An Introduction To Economics

AN INTRODUCTION TO ECONOMICS

MACMILLAN \ND CO, I tMt-rn
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vciro i t

1HL MACMM1W COMP\M

m:p \ork i ^vo cji CARO
dai t vf <\ rPA ckco

THV MACMILTAN CO 01 CANADA I -tv

■Of'O TO

AN INTRODUCTION TO

ECONOMICS

FOR INDIAN STUDENTS

BY

W. H. MORELAND, CSL. O.I.E.

of mi. india\ civil service

MACMILLAN AND CO, LIMITED
ST MARTIN’S STREET, LONDON

COPYRIGHT
First Edition 1013

Reprinted 1016, 1010, 1020, 1026, 1027, 1028

PRINTED IN GREAT BRITAIN

PREFACE

The object of this book is to provide a statement of the
leading ideas of modem Economic Science in terms that
will be easily understood by Indian students. The study
of Economics in India is rendered unnecessarily difficult
by the fact that in its early stages thero is so httle common
ground between the student and his text-books the
knowledge of western industrial life which western text-
books assumo is not possessed by the student, and the
illustrations consequently in many cases only increase
the difficulty which they are intended to remove I hope
that the study of the science, whioh is of such vital impor-
tance to the future of India, will bo facilitated if its leading
ideas can bo apprehended in the first place in terms of
the Indian field and market-place.

The book is designed to serve as an introduction to the
larger text-books and the classical writers, and the mam
lines of its construction are therefore fixed In one respect,
however, I have ventured to depart from tradition It
will be seen that while the factors of production are at first
treated m the traditional order (Land, Labour and Capital),
this order is altered in the section dealing with Distribution.
The chief consideration that has led to this change is the
importance of laying stress on the fundamental unity of
the science, and of showing that a thorough study of the

vi

PREFACE

equilibrium between supply and demand i«* as essentia)
to a mastery of the problems of Distribution as of the
problems of Value m connection with v Inch it first appears
Now it is not easy to present this fundamental unit}' if
the traditional order is followed the student comes first
to the subject of rent, with all the complications arising
from the special features of land, and when ho passes on
to wages, his attention is directed to the particular features
of that branch of the subject It seems to mo that — at
least in the present state of development of Iho Indian
markets — the object m viov can host bo attained by
beginning with the subject of interest, where the funda-
mental urnty is modt easily scon, and passing thence to
those subjects where other factors in the problem become
of relatively greater importance

It may perhaps savour of presumption if one who has
no practical experiences in teaching offors suggestions as
to the manner m which the Bcicnco should bo taught
But, like other employers, I have been forced by experi-
ence to realise that to a largo proportion of Indian
students of Economics the science is purely abstract, and
hears very little relation to tho facts of Indian life I
venture, therefore, to suggest that, particularly m tho
early stages of the course, stress should ho laid on the
concrete interest of the science, and that students should
be provided with opportunities for observing economic
facts for themselves, whether m the form of pnee-hsts,
market-reports, and selected statistics, or of facilities for
seemg how production is actually organised in the neigh-
bourhood of their college They will thus bo helped to
realise that the science anses out of the facts of life, and
is not a thing to he first learned and then applied to those
facts

PREFACE

vii

I have to thank Mr G. Findlay Shirras of the Indian
Educational Service for many valuable suggestions regard-
ing tho chapters that deal with Distribution.

W. H. MORELAND.

CONTENTS

BOOK I. INTRODUCTORY

CHAPTER I.

)/ The Meaning of Economics

PACK

Tho need of understanding the terms used — Provisional
definition of Economics — Tho word Economics — Laws
— Science - 3

CHAPTER H.

v Ties Meaning of Wealth and Value

In its ordinary use Wealth is applied to things that are
desirable — but not to all desirable things — The classes
of desirable things that are included m the term — In-
dividual and National Wealth — Value — Price - - 9

CHAPTER 3H.

\j The Meaning of Production and Consumption

Mam divisions of the science — The nature of the processes
described as production — and as consumption — Gradual
consumption — Alternative definition of Economics — The
study of wealth is part of the study of man -

X

CONTENTS

CHAPTER IV.

Some Assumptions

Necessity of limiting the subject by moans of assumptions—
The subject is mankind in general and not a particular
race — The existence of organised governments assumed
— Industrial Freedom assumed — Existence of money
assumed — Assumptions m regard to definitions

BOOK II PRODUCTION
CHAPTER V.

The Factors of Production

The process of production illustrated — The use of Land,
Labour and Capital — Further illustrations from the work
of cultivators — of artisans — of factories — of railways

CHAPTER VI.

Land

The meaning of land — Limitation of its quantity — Im-
portance of situation — Examples of the rise and decay
of townB — The need for means of communication and
other natural advantages — The need for enterprise

CHAPTER VIE

Agricultural Land

Situation is important — but also fertility — Standard of
cultivation varies with fertility— r Law of Diminishing
Returns — Its qualifications

CONTENTS

XI

CHAPTER Vm.

Labour

Nature of Labour — Need of somo inducement to make men
work — Amount of work done depends partly on numbers
and partly on efficiency — Factors affecting numbers —
Birth-rate and death-rate — Migration — Malthus’ Law of
Population - - - -

CHAPTER IX.

Mobility of Labour

Inequality of the supply of labour — Nature of migration — •
Conditions affecting mobility — Caste and Iocabty — Habits
of mind affecting the country-population — Social and
economic pressure — Causes of Increased mobility — Change
of occupation --------

s CHAPTER X.

Quality, or Efficiency, of Labour

Health and strength — Skill — Manual training — Influence of
the caste-system on training — Education — Moral quali-
ties — Effect of adequate incentive -

CHAPTER XI.

Intellectual Work

Size of population less important than state of development —
Conditions ns regards mobility — Effect of caste —
Efficiency — Desire for excellence — Tendency to replace
manual by intellectual work -

PACK

52

61

70

79

CONTENTS

xu

CHAPTER XII

Capital

hoi

Meanin g of Capital— Illustrations— Saving— Borrowing —
Accumulation of wealth— Need of government — Use of
wealth as capital ..------88

CHAPTER Xm

Organisation op Production The Self-
supporting Stage

Stages of Production — Description of a self-supporting
village — Beginnings of trade — Its effect on the amount of
wealth ------- - 9B

CHAPTER XIV

Organisation of Production The Artisan Stage

Conditions of production in this stage — Increasing difficulty

of the business side of production ----- 103

CHAPTER XV.

Organisation of Production The Factory Stage

Example of a factory — Separation of business from labour —
Division of labour — Use of machinery — Use of mechanical
power — Characteristics of the system — Need for large
capital . _ _ _ up

CHAPTER XVI

Organisation of Capital

Need of organisation — Functions of banks — Their limitations
— Limited companies — Savings banks and similar in-
stitutions --

CONTENTS

xui

CHAPTER XVH.

SPECIALIS 4.TION OF THE FACTORS OF PRODUCTION

MO*

Specialisation o£ land — Localisation of industries — Specialisa-
tion of labour — Specialisation of capital — Increase of fixed
capital — Causes of specialisation - 125

Noto on tho relation of costo to specialisation of labour - 131

CHAPTER XVm.

Production Concluding Remarks

It is probable, but not certain that production will develop in
India ns it lias developed elsewhere — India needs increased
production, but tho manner of Distribution is also
important — Some defects of the factory-system — Possible
alternatives -------- - 132

BOOK III. CONSUMPTION-

t

1 '"CHAPTER XIX.

Wants

Wants with which tho Economist is concerned — Their nature
— Their intensity — Possibility of complete satisfaction —
Increase in number and variety of wants — Differences
in tho rate of this increase ------ 139

CHAPTER XX.

i / y

\ Wants ( continued )• Some Exceptions

Wonts which apparently cannot be satisfied — Men whose
wonts do not increase — Difficulty of exact definition of
economio wants - - - - - ■ - *, 145

CONTENTS

sav

CHAPTER XXI

Necessaries and Luxuries

rAox

Necessarios for existence? — for cflicicncj— -Con\ontional
necessaries— Habit and custom— Their grndunl changes
The rato of change — Comforts and luxuries * - 151

CHAPTER xxn.

The Demand or an Individual Consumer

The way in which a man’s income is spont — Utility of

different commodities — A demand schedulo - 169

CHAPTER XXDI

Changes in a Consumer’s Demand

Change of income — Its offect on the demand schedulo —

Relation between Wants and Demand - - • <106

CHAPTER XXIV.

Demand or a Community

Relation of an individual's demand to that of a community — 4

Demand of various classes in a community — The Law
of Demand — Exceptions to the Law — Substitution —
General appboabibty of the Law of Demand

’00

CONTENTS

xv

BOOK IV. DEMAND AND SUPPLY
CHAPTER XXV

PRELIMINARY CONSIDERATIONS

paok

Moaning of tlio expression Demand and Supply — The central
question is tlio mutual adjustment of Supply and Demand
• — Equilibrium in the earlj stages of production — Meaning
of tho term Market ------- 179

CHAPTER XXVI.

Temporary, or Market, Equilibrium

Example of a siraplo market — Effect of increased domand —
of increased supply — of diminished supply — Influence of a
rise in prices on consumption - - - - - 186

* CHAPTER XXVJI

Market Equilibrium , Some Complications

Presonco of producers and consumers m tho markot — Import
and export — Combinations — Substitution — Holding up
stocks — Donlers who both buy and sell — Forecasting
tlio future - -- -- -- -- 192

CHAPTER XXVIII.

Relations oe Producers and Consumers

TO THE ftlARKET

Wholesale and retail transactions — Retail prices — Influence
of consumers’ demand — Position of producors — The lower
limit of price is fixed by tho expenses of production —
Summary of market equilibrium - - - - -

201

XVI

CONTENTS

CHAPTER XXIX.

Normal, Equilibrium

l*A ft 9

Existence of standards of price — Changes m the standards
— Illustration from llio artisan stage of production —

Result of a fall m price be] on the expenses of production
— Result of a rise in price — Approximation of price to
tho expenses of production — Illustration from the factory -
stago of production — Summer} — Use of tho words Cost
and Expenses 208

CHAPTER XXX.

Changes in Expenses of Production

The way in which expenses are controlled — Imaginary state
where expenses do not change — Illustrations of such a
state — Causes of cliango — Tho question of time - - 218

CHAPTER XXXI

Conclusions

Tho answer to tho central problem — Its necessary comphcn
tion — The method of studying such complicated probloms
— The need of explicit statement of assumptions — Relation
of this discussion to Distribution ----- 227

BOOK F. DISTRIBUTION

-•* CHAPTER XXXTT

Introductory

The nature of Distribution — The various claims for a share
of produce — Depreciation — Taxation — Tho position of the
producer — Profits — The way in which the subject of Dis-
tribution is treated — Distinction between buying and hiring 238

CONTENTS

CHAPTER X XXTTT

Ivre.nrsT on Capital

r*os

Origin of Joans on intercut — Waiting for enjoyment of
wealth — Bargaining os to the rate — Gradual nso of
money-lender*, — Roculnr mnrketa for capital — Demand
and Supply in such n market ----- 243

CHAPTER XXXIV.

Interest (ccmhinted)

Gross and net mt crest — Charge for msuranco ognmst nsk —
Charge for management — Not interest and bank rates —
Normal rate of interest — Seasonal \nnalions in tlio rate —
Changes in the normal rate ------ 252

CHAPTER XXXV.

Interest (continued)

Interest paid by agriculturists — High charges for insurance
and management — Co-operative credit — Interest paid by
artisans — Summary ------- 260

CHAPTER XXXVI

Rent of Land

Early Indian tenures— Tho do\ elopment of landholders
and tlio beginnings of a mnrkot — Nature of rent-rates —

The Demand for lnnd — Tlio Supply — Results of tho
bmitation of supply — Tlio normal lo\cl of rents m Indian
conditions 267

CHAPTER xxxra.

Rent (continued)

Kents in n different social state — Tho margin of cultivation
— Tho classical theory of rent — Its application to Indian
conditions — Rolation of rents to prices - 274

xvni

CONTENTS

CHAPTER XXX Vin.

Limitation of Rents by Legislation

pao*

The economic justification of legislation — Nature of fertility
of land — Need of Fixity of Tenure and of Fair Rents —

Nature of existing legislation — How rents are actually
determined .... - 281

CHAPTER XXXIX.

General Wages

Origin of customary rural wages — Causes tending to produce
alteration in the customary rates — Appearance of markets
for labour — The imporfections of existing markets - - 288

CHAPTER XL

General Wages ( continued )

Prevailing Rates of Wages — Additions to wages — Real and
money wages — Working of a labour-market — Limits of
the Demand — Variation of Demand with the rate — Appli-
cation of the Law of Demand — Relation of efficiency to
the rate - -- -- -- -- 292

CHAPTER XLI

l

v

General Wages ( continued )

Supply of labour — Attractions and drawbacks of various
forms of work — Net advantages — Impossibility of storing
labour — Variations in efficiency — Time required for in-
crease of population — Retardation of changes in the rate
of wages — Examples of changes — Normal rate of wages— >

The standard of comfort - 300

CONTENTS

xix

CHAPTER XLH.

General Wages { continued ,)

PAOfc.

Changes in normal wages — The present standard of comfort
— Effect of a nse in wages, (1) if efficiency is unpaired?

(2) if efficiency is increased , (3) if idleness results —
General conclusion — Influence of women - - *310

1

CHAPTER XLm

i

Earnings of Specialised Occupations

Nature of the market — The Demand — The Supply — Effect of
caste — Need of special training — Net advantages deter-
mine the choice made by parents — Tendency to equalise
net advantages is imperfect — Unemployment - - 318

CHAPTER XLIV.

Earnings of Management

The position of the producer — Supply — Nature of training
— Difficulty of getting a start — Demand — Conditions
required for the development of the market - 327

CHAPTER XLV.

Summary. The National Income

Summary of the conclusions reached — The National Income
— Causes affecting its amount — The effect of character
under the regime of Industrial Freedom — Advantages and
drawbacks of this rigime — Possible alternatives — Limita-
tions of Industrial Freedom ------ 332

INDEX

340

BOOK L

INTRODUCTORY.

CHAPTER I.

THE MEANING OP ECONOMICS

When a student takes up a now subject he wants first of
all to know what it is about and what is meant by the
words which ho has to use In the case of some subjects this
is a simple matter ; the meaning of the words used m them
is absolutely fixed, and the student begins by learning their
definitions by heart Thus, the student of geometry
usually begins by learning the definitions of such words
as point, or line, or circle ; and when he has once learnt
them he knows that all through the course m geometry
they have precisely the same meaning, and that there is
no risk of his being misled by a word being used sometimes
in one sense and sometimes m another There are, however,
subjects, and Economics is one, where this method is
not applicable, because all writers are not agreed on the
me anin gs of the words used , the words are used in ordinary
conversation vaguely, and with more meanings than one,
and even when a writer defines the sense in which he intends
to use a word he sometimes uses it in another sense, and
may thereby mislead his readers In studying such sub-
jects it is necessary to examine the meanings which each
water attaches to the words used, to be constantly on the
watch for double meanings, and to use qualifying adjectives
when there is any risk of a misunderstanding.

4 AN INTRODUCTION TO ECONOMICS

Now the Science of Economics consists of the study of
the Laws of the Production, Consumption and Distribution
of Wealth , or, speaking populaily, how men or nations
got Wealth, and what they do with it Each one of the
words printed with a capital lottor m the last sentence
needs careful examination

Economics, the name of the scienco, is formed from the
noun economy, which in current English use has more
meanings than one It is derived from the Greek language
and originally meant ‘management of the household’)
and in popular use it is still closely connected wnththo
idea of household expenditure, since we speak of a person
spending Ins income with proper economy, or being econo-
jrncal m his habits But the scnMo „ s0 „f fte word
, <Je ™ lopcd m ° Afferent direction tot it woo used

of’tlln ^ 0IlendI y not merely mnnngemont

ae household, and then mom detotely for the manago-

ZL ^ ^ *** who began the study of tte

on wbehlho qi 7 m 7 ercsted m out the pLciples

wealth, and be^Ll^^f ^ °!

t EC “° m7 ' 01 ” ^ -"Zootomy

VtocapU™ 0 ' 14 ' ° f 8,6 State - «”* «>e worf
Economics has wad* meanm S s > a nd the shorter name

—

we may praise a map t t0 , do mtix being economical ;
economical hut the so^ aV01 ^f '" raste ' tIia t is, for being

do with prL."l «h bTal 0£ EMMB,0S ^ »

J'f •» principal

hegmnmg “T ’ 1

top every time they come to

MEANING OF ECONOMICS 6

the word and remind themselves of the sense m which it is
used In ordinary talk a Law means a command addressed
to the people in general, and telling them to do, or not to
do, something ; and Law, or Laws, indicate a body of
such commands. In India these laws or commands are
either drawn from the Sanskrit or Arabic writings, or are
in the form of Acts passed by one of the Legislative Co uncils :
much of a Hindu’s conduct is commanded by the Shastras,
■while a Muhammadan is guided largely by the Koran and
the Commentaries , and all alike are subject to the Tndmn
Penal Code and other Acts passed by the Council -
But in science there is no idea of telling people what to
do In science a Law is simply a statement that something
tejikd y to h appen in certain cond itions, and when we speak
of the Laws of Matter or of Motion, or of Economics, or
of Political Science, Tie are referring to the conclusions that
have been drawn from experience as to what is likely to
happen when certain conditions exist Everybody is
familiar in a general way with many 1 Laws ’ in this sense
of the word . it is common knowledge for instance that
water will flow downhill ; and the physical sciences are
usually based on these general laws, which are developed
and made definite as the result of successive experiments,
and of argument as to the moanmg of the experiments,
until a large body of conclusions has been drawn as to what
will happen m very various conditions Thus we now
know 7 , not only that water will flow downhill, but the rate
at which it will flow down a slope of any given steepness,
the size of an embankment required to prevent it flowing,
and many other conclusions, with the aid of which engineers
are able to construct drainage-schemes or irrigation-canals,
and to supply towns and cities with pure water drawn from'
a distant source. These ‘ laws * of the movement of water m

6 AN INTRODUCTION TO ECONOMICS

given conditions, which constitute the science of hydraulics,
do not tell people what to do or what not to do The
engineer learns from them how to achieve his object, and
in popular talk he may be said to ‘ oboy ’ them just as a
man obeys the Penal Code , but this use of the word obey
is figurative, and may mislead In the first case, a man
knows what is likely to happen and makes his plans accord-
ingly , m the second, he refrains from doing something
because it is forbidden by the order of Hie Government,
which will punish him if he disobeys
Now Economics, like the physical sciences, is based on
the every-day experience of the world, and endeavours
to state that experience in a set of conclusions which
will show what changes m regard to wealth are likely to
follow from changes m the conditions under which people
live These conclusions are called laws, bnt it must be
repeated that they do not form commands, that is, they
do not tell people either how they should get wealth, or
what they should do with it when they have got it

There is one obvious difference between the position of
the physicist and that of the economist The former can
carry out experiments on a very large scale, that is, he can
make the conditions and see what happens, while the
economist can very rarely experiment, but must content
lnmself with watching the changes that take place in
conditions, and their results, and arguing as to the meaning
of his observations The student of the movements of
water, for instance, can make water flow down any sort
of channel he cares to construct, and can measure the
velocity of the flow in the conditions ho has produced
but the economist is not dealing with water or clay, but
with the human bemgs who produce and consume wealth ,
ho cannot make them alter their ways of working or of

MEANING OF EC0N051ICS 7

living at his pleasure, but only observe what happens
when the conditions change It is largely owing to this
reason that in the science of Economics the conclusions
or ‘ laws * are far less definite, and open to many more
exceptions than is the cose in sciences where systematic
experiments are possible It is very difficult to be sure
that we have not overlooked some change in the conditions
that has taken place , and even senous students may
thus be misled and may attribute a result to a cause which,
in fact, has had little or nothing to do with it, just because
they have overlooked the true cause or causes The same
danger of mistake is, of course, more frequently run by
writers in the press, who m many cases have never studied
any branch of the subject, and may find themselves called
on suddenly to explam changes that excite pubhc interest,
such as a rise in prices, or an mcrease in exports Much
that is misleading appears in the press on such subjects,
and students will be wise not to accept everything they
read, but to wait until their study of the laws of Economics
enables them to draw conclusions for themselves and to
criticise the conclusions drawn by others

It will be obvious that in order to understand these laws
of which we have been speaking, a student must know a
large number of the facts on which the laws are founded
Here, as we have said, he is at a disadvantage compared
with the student of a science such as physics, who can
satisfy him self by experiments m the laboratory that the
lavs which he is studying really hold good The student
of Economics has no laboratory , and he cannot as a rule
ascertain or verify many of the facts for himself He has
therefore to take them from books; and a large part
of his studies will consist of Economic History and of
Statistics {Economic History means the history of the

8 AN INTRODUCTION TO ECONOOTCS

production, consumption and distribution of wealth among
various nations m the past Statistics mean facts bearing
on tho same subjects, stated in figures and arranged so as
to show the changes that aro in progress But the study
of history and statistics is made vorj much easier by a
preliminary know ledge of tho chief conclusions or laws
that have already been based on them , and so it is best
for students to begin by acquiring such a knowledge,
illustrated by facts already familiar to them, and then to
study the laws m more detail and in tho light of history
and statistics

The word Science, which wo have already apphed to
the subject of Economics, requires a short c\planation.
Originally it meant simply know ledge, but its use is now
restricted to a certain kind of knowlcdgo, namely the
knowledge of some particular subject stated m the form of
laws (in the sense which has been csplauicd) Thus tho
knowledge that water runs downhill is not m itself a
science but the science of Hydraulics has gradually grow n
up as the behaviour of water in various conditions has
been ascertained and stated m more or less definite terms
In the same way, there was a tune when no science of
Economics existed, simply because the facts had not been
studied and conclusions had not been drawn tho study
is even now by no means complete, hut it has made so much
progress that laws or conclusions have been drawn dealing
with most of the more important facts, and it can now,
therefore, be properly desenbed as a science

CHAPTER H.

THE MEANING OF WEALTH, AND VALUE

We have now to explain the meaning which is attached to
the w ord Wealth, tjio subject-matter of ou r science This
word, like most of those vThich wo have to use, is commonly
employed in orduiary language, and as was said in the last
chapter, we have to be careful that whenever we use it
wo use it in a definite sense. {When m ordinary talk we
speak of a man’s wealth, we probably think first of all of
the things which wo know he owns : his land and houses
his carnages, horses, elephants and motor cars . his gold,
silver and jewels . his money lent to Government or to
pnvate persons, or invested in railways or factories, or in
coal-mines or other industries If we want to compare
the wealth of two men, it is things like these which we take
into account : only in order to make the comparison we
think of the total money-value of such things, and say
that one man’s wealth is so many rupees or so many lakhs,
and that another’s is so many rupees or so many lakhs
more or less *

Now the things -which we have named, and the various
other things -which we speak of as wealth, are at first sight
very different from each other but if we class them m
ordinary talk under the single word wealth, it means that
they have all some important quality in common, and to

10 AN INTRODUCTION TO ECONOMICS

make sure what wo mean by wealth we havo to find out
what tins common quality is What quality is common
to land, and elephants, and diamonds, and Government
paper, and the olhor things that we speak of as wealth 1
The answer is that they are all things which wo should like
to possess for ourselves

It is true that in most countnes persons will bo found
who do not wish to havo such possessions of their own,
and the number of such persons is probably larger m India
than m Europo, because of the tendency to adopt an nscetio
way of life , the sincere sannyasi or fakir is distinguished
from the rest of us mainly by tho fact that ho docs not wont
to possess things of the kinds which we have named But
even in India sincere ascetics form only a very small pro-
portion of the population, and leaving them out of account
it is correct to say that ordinary people want to possess tho
same lands of things, and that among tho things they want
are those which we are discussing

( We may say then that all the things of which wo usually
think when we speak of wealth aro desirable, that is to say,
they are things which ordinary people would like to havo.
But while all tho things wo speak of as wealth are desirable,
all desirable things aro not spoken of as wealth Family
affection and friendships for instance aro desirable t hing s,
but we should never speak of them as pait of a person’s
wealth , nor indeed would it be possible for us to do so if
as is usual we reckon the various items of wealth at their
money-value, for wo cannot assign a money-valuo to such
possessions, much as we mav desire them Most of us
again desire such things as good health or skill at games,
but they are certainly not wealth m tho ordinary sense of
the wordi In order then to settle the meaning of the
term wealth as ordinarily used, we have to seo what

MEANING OF WEALTII AND VALUE 11

kinds of definable Hungs it includes, and -what lands it
excludes

Desirablo tilings can bo classified m various ways One
obvious distinction is between those that are material,
that is to say, llioso that \\ o can see and handle, and those
that are non-ma tonal and so cannot be recognised by
o ur senses of sight and touch j The things which we have
enumerated at the beginning of this chapter are all matenal ;
and it is correct to say that most material desirable things
aro included in the ordinary use of the term wealth Non-
material desirable tili ngs aro of two kinds^) One kind,
• which may bo called interna^ includes such things a s '
good healthy or ability In business) o r skill in a profession ;>
such qualitics moQ'bo employed in order to obtain matenal
things, b ut in ordinary talk we do n ot c ount them as wealth
though they may bo employed as sources of wealth.^ The
second kina of non-material things may~be caU ed'ext emal c
they are not qualities ot me poraonTnmself. like skill or,
ability, but arise out of his relations with other people __
The commonest examplo of them is what unspoken of
variously as * good-will ’ or * practice * A successful shop-
keeper who wishes to sell his busmess will charge not only
the price of his stock of things for sale, and of his shop (if
he owns it) , he charges something more for ‘ good-will *
The buyer will pay for this because he knows that he is
more likely to succeed m carrying on a shop with a reputa-
tion already made, where people are accustomed to deal,
than if he opens a new shop and has to persuade people
to come and deal there : the ‘ good-will ’ of the shop is
in fact a desirable thing, and he is willing to pay something
for it This fact explains why in some towns it is quite
rare to find a trader or shopkeeper doing busmess under
his own name the firm may have changed hands several

12 AN INTRODUCTION TO ECONOMICS

times, but the names of the original owners ore retained
y{n order that the old reputation of the firm may not be lost.
In the same way a successful doctor or dentist can sell lus
‘ practice ’ as it is called m this case , that is, some other
doctor or dentist will pay him money in order to succeed
him and have a chance of treating the patients who would
have come to him We do not perhaps hear much of
‘ good-will ’ or * practice ’ in ordinary talk, but among
business or professional men the thing is very real, and
its value is taken into account in considering the wealth
of a person or a firm

l Tn or dinary talk then, we mean by wealth most desirable
things that are material, and a few that are non-material
and external, such as practice and good-will,^ We say
^ most things that are material, because some classes of
4hese are commonly excluded Thmgs like good roads
or a well-drained town, are clearly desirable, but though
they are great convemences to an individual we do not, os
a matter of fact, regard them as part of his wealth We
limit the use of the word to thmgs which a man can soli,
or give away , and if wo want to know whether a thing is
classed as a man’s wealth or not, the simplest test is to see
if he can sell it or transfer it to some one else
This then is the ordinary meaning of the word Wealth
Writers on Economics have defined its meaning for their
own purposes in various ways, and the word does not
include exactly the Bame thmgs in all books on the subject •
students have therefore to he careful that they understand
the meaning adopted in each book which they read But
modem English writers as a rule aim at using the word as
nearly as possible in its ordinary meaning, and follow-
ing this practice we shall use it m the sense explained
above.

MEANING OF WEALTH AND VALUE 13

For some purposes, economists have to consider the v> ealth
of a nation or a community as distinct from the wealth
of the individuals of v Inch it is composed. The wealth of
a nation includes firstly the total wealth of those indi-
viduals, and secondly a variety of thongs which are not
counted os individual wealth If we know the amount of
the v ealth owned by the individuals, it is merely a matter
of arithmetic to ascertain the total ; the difficulty of making
the calculation lies in finding out the amount of the wealth
of the individuals, and this difficulty is felt very seriously
in a large numbor of economio investigations The student
however will not feel this difficulty until he has advanced
sufficiently far to think of undertaking such investigations
for himself, and in the early stages it is enough for him to
know that this difficulty exists, and that the accurate
calculation of the woalth of any large number of individuals
requires a great deal of labour as well as a tramed and
acute judgment The second group of things which are
included in national woalth are those which are the property
of the nation as a whole or of some subdivision of it, and
not of its individual members This group includes such
tilings as railways and canals owned by the State, pubhc
buildings, and the material equipment required for the
work of Government, whether it be the store of gold and
silver held by the Treasury, or things like mail-carts and
pillar-boxes In addition to such material things, some
writers include in national wealth various non-material
thin gs, such as the organisation of Government. Here
too the exact limits of national wealth are not at first of
much practical importance to the student : the important
pomt is that when he reads anything on the subject he
should make quite certain what elements that particular
writer includes in the term

14 AN INTRODUCTION TO ECONOMICS

Further, a considerable proportion of tho national wealth
may be made up of things owned collectively by portions
of the nation rather than by tho nation os a whole Thus,
if an economist should attempt to calculate tho wealth of
India, he would have to reckon, first the wealth of all the
individual inhabitants , then the wealth owned by tho
Government of India , then tho wealth of each provincial
Government , and then the wealth of local bodies such as
district or municipal boards, and even of viUago-commumtics
in places where these have a recognised legal position and
possess wealth of their own The provinces, for instance,
own roads and bridges and embankments, as well as
buildings for various purposes * municipal boards own
streets and drains and lamps, and may own waterworks or
tramwayB or other undertakings the district or local board
owns roads and bridges, or schools and dispensaries - while
even a village panchayai may own wells or tanks or drains.
All such things form part of the wealth of the nation In
the same way account must be taken of all wealth owned
by other pubbe or private bodies , property belongmg to
a temple or a mosque, or owned by a charitable committee,
or by the governing body of a college, is all part of tho wealth
of the nation.

Lastly, m reckoning the wealth of either an individual
or a community care must be taken to deduct the amount
of his or its debts Thus, if a landholder has mortgaged
a village, we must not include in his wealth the full value
of the village, but must deduct the amount of the mortgage.
So if a municipal hoard has borrowed money to construct
waterworks, the amount of its debt must bo deducted
from the value of the works, and in the same way a nation
must allow for the money it has borrowed to construct
railways or canals or for other purposes

MEANING OF WEALTH AND VALUE 15

Enough has now been said to indicate in general terms
the meaning that is attached to the word wealth; but
students must be careful not to think that they understand
it merely bocauso they have read so far. In this case, as
with almost all the w ords wo shall have to explain, it is not
enough to learn a definition by heart : we must reahse
what it really means, and it is an excellent practice to test
our knowledge of it by applying it to things that we see
in the course of our daily life. For mstance, a student
walking to college m tho morning may ask himself Are
tho roadside trees wealth 2 and whose wealth 2 Is the
mission-church wealth 1 and whose wealth 2 Is the
fountain wealth 2 and whoso wealth * Is tho college
hockey-ground wealth ? and whose wealth 2 Discussion
of questions such as these in the light of whatever definition
of wealth is used in their text books will soon familiarise
students with the idea in a way that no study of the books
themselves can be expected to do

The word Value is closely connected with the idea of
wealth, and its meaning must bo indicated at this point
This w ord again is in ordinary talk used vaguely , when we
speak of something as * valuable ’ or * of great value * we
are usually referring to some standard or ideal and prais-
ing the thing because it comes near to our ideal In
Economics the word makes no such implied reference,
but is used m a definite sense which must be clearly under-
stood

We start with the fact that people constantly exchange
portions of wealth for one another, and the Value 1 of a thing

1 Some writers distinguish two senses of tho word, called, * Value
in Exchange,’ and ‘Value on Use* In these writers ‘Value m
Exchange’ has the meaning assignod in the text to ‘Value,’ while

‘Value in TTse’ means what we shall speak of later on as ‘Utility ’

16 AN INTRODUCTION TO ECONOMICS

means simply the quantity of some other thing for which
it is exchanged Thus Value is a relative term, and imphe3
that one t hing is compared to another . if there were only
one thin g m the world, the idea of value could not exist
because no exchange would bo possible For instance,
a cultivator who wants a ser of ghi may obtain it by buying
it at a shop, or, ho may got it from a neighbour m exchange
for say sixteen sers of wheat If the two agree on this
rate of exchange, then, so far as that transactions concerned,
the value of one ser of ghi is sixteen sers of wheat, and tbo
value of one ser of wheat is one-sixteenth of a sor of gin
These are not two facts, but merely different ways of
stating the same fact, namely the relation m regard to
value that exists at that moment and m that place between
wheat and ghi If the cultivator takes the other course
that is open to him and buys a ser of ghi at a shop for one
rupee, then we may say either that the value of a ser of
ghi is one rupee, or that the value of a rupeo is one ser of ghi .
the tw o statements mean exactly the same thing.

All nations have found it convenient to make use of a
single article, or a small number of articles, as money , and
the word Price is simply a short w ay of expressing the value
of a thing in terms of money . to say * the price of ghi is
one ser the rupee,’ is precisely the same as to say * the
value of one ser of ghi is one rupee 5 The subject of Money
will require much study at a later stage, but for the present
w e accept its existence as a fact, and w e use it, as w e have
already said, to measure the amount of wealth , we take
each item of wealth at its price, that is, at its value expressed
in money, and add up these pnees or values so as to got
the total value of all the items.

CHAPTER HI.

THE MEANING OP PRODUCTION AND
CONSUMPTION.

(VVe have now seen what is meant by the term Wealth, the
subject-matter of Economics , it includes most material
things, and also a few non-material things, such as ordinary
people vs ould like to possess for themselves, and which they
can transfer to others} The Laws of the science relating
to it are usually studied in three mam groups, which deal
with the Production, Consumption and Distribution of
wealth.

Production means the study of the way in which wealth
becomes available for use Consumpti on is lust the
opposite of P roduction, a nd means the study of the way
in which w ealth is use d up aud ceases to be available A
DistrlbuTionaeals with the way in which wealth comes
into the possession of particular people or groups of people,
v/ It is necessary for students to take up one branch of the
subject at a time, but it is most important that in doing
so they should not forget the existence of the other branches.
When studying Production, for instance, it is necessary
to remember that the production of weal th is not a th ing-
by itself^ wealth is produced by men in order that they
may consume either the wealt h which they pro duce or
else other things ior which they exchange it. i So in studying
— -gr

18 AN INTRODUCTION TO ECONOMICS

Consumption we must not forgot that most of the men
who consume are also producers, and that their consumption
must depend largely on what they can produce
^ The first thing is to make quite sure what happens wh oa.

\ wealth is * produced^ or ‘ consumed" 5 Wo have seen that
mosFwealth consists of mater ia l things, but wo must not
t.HinW .W. tVin processes 'which yflTirc studjong mvolvo
the production or destruction of matter This is an
impossibility, as the various physical sciences teach us :
we can change the form or the arrangement of matter, but
we cannot destroy it, nor can we brrng now matter into
existence The meaning in which the terms production _
and consumption are used will become apparent if we
examine a few instances w —

Take, fo r instance, a tailor making a coat Ho cuts
irom a roll o f cloth pieces of the requir e d shape and sews
them to gether with, thread hedoes hot make the cloth
or the thread, but Tie re-arranges them, and (if ho has
done Ins work properly) the purchaser obtains a comfoi table
and well-fitting coat, which is for him a useful thing, more
useful than the original piece of cloth would be It ma ^
be said that thoug h the tailor makes nothing new t he
weaver doesj~, b ut if wo watch a •weaver at work we shall,
fige tha t he mer ely takes pieces of thread or yam and
re-arranges them so as to produce the cloth j The weaver
doe§~hot make new matter any more than the t ailor does,
but he arranges thread or yam in such a way that it becomes
moTe useful to the tailor ^ ~Iri the same way the spinner*
merely takes cotton, or wool, and arranges it in the form
of thread or yam m which it becomes useful to the weaver.
So far, then, anyone can see for himself that the spinner,
the weaver and the tailor do just the same land of work,
each of them taking some form of matter and re-arrangmg

MEANING OF PRODUCTION 19

it so as to mako it more usoful The earlier stages in the
processes of production are of exactly the same nature,
but this is not so easily apparent to the student unless he
has acquired some knowledge of the sciences of ch emis try
and phj’siology, and of their applications to the arts of
agriculture , and, m fact, there was a time when the culti-
vator was considered to do something different from the
artisan But it is now well known that the oultivator
can only re-arrange the matter of the soil, put the seed in
it and apply fresh matter in the form of water or manure ,
the plant is not new matter, but is built up from the gases
present in the air, and from the water and other matter
present in the soil Thus the cotton-fibre from which the
spmnor makes yam is not new matter produced by the
cultivator, but is built up from the air and water and soil,
and the cultivator’s work consists in making these more
useful to the spinner, just as the spinner in his turn is
making things useful for the weaver. In the same way
the wool that grows on a sheep’s back is not new matter,
but is formed from the food which the shoep has eaten, and
that food is formed from the soil and the an exactly in the
same way as the cotton-plants are formed The shepherd
who rears the sheep thereby makes the transformation
possible from matter m the form of grass and herbs to
matter m the form of wool, that is, into something more
useful to the spinner.

Everyone, then, who is concerned m the production of
a coat, or of the materials from which it is made, takes his
part in rendering some portion of matter more useful for
the purpose In this connection the word ‘ useful ’ means
the same thing as ‘ desirable,’ both alike indicating that
some want is satisfied , and all the workers to whom we
have referred are thus producers of some material desirable

20 AN INTRODUCTION TO ECONOMICS

thing, that is, of somo wealth Tho fact is commonly
expressed in the phrase that man produces not matter
but utilities , the word utility is, of course, closely connected
in origin and m meaning with the w ord 1 useful ’

If v,o examine other forms of production, we shall see
that in their case also what is produced is not new matter
but new utilities Tho maker of sweetmeats uses sugar
and milk and ght and other materials so that tho product of
his work satisfies a particular want or sot of wants , the
potter takes clay and shapes it in the form of plates or
vessels , the carpenter uses wood and nails to make a box
or a table „ and if students will examine from this point
of view the work of all the artisans or factories with which
they are familiar they will see that in all cases tho nature
of the process is the same existing matter is transformed
and re-arranged so that it becomes more adapted to meet
some particular want, or, in other words, so as to increase
its utility,

Stated in this way, the conclusion will probably appear

to be obvious , and when it has been thoroughly grasped
the student will have no difficulty in seeing that the word
Consumption denotes processes of exactly tho opposite

kin d . Men do not consume matter, but only utilities ;

[fTCfcl ,rT n > -- - 9

iuu u . im

i6 amount of matter present in the world

is not d imin i s hed by tho act of consumption, but some of

i it is re-arranged so that it is no longer capable of satisfying
a particular want^-^Thus, when a man eats sweotmeats.

his desire for them is satisfied by the process of eatmg ;
the matter of which the sweetmeats are composed i s not
lost, but (as the study of physiology shows) it is used up
in the body and eventually returns to the air, the water
, or ^e soil.Jihe sources from which it was originally drawn
Or when a man lights a fire to warm himself or cook

MEANING OE PRODUCTION

21

food, his want for heat is satisfied by the fire, but at thf
same time the matter fo rming the wood is dispersed mtc
the air _as smoke or steam, or left m the form of ashes, and
is now no longer capable of satisfying a want for heat )
There is one distinction among methods of consumption
which is of some practical interest. In the cases we have
stated the utility is destroyed in a single operation, by
eating the sweetmeats or b urning the wood , but apart
from food and fuel, most forms of wealth may be used for
a considerable time, and their utility is only gradually
consumed. A coat, for instance, may be worn for many
months, and continues to satisfy a want the whole time
it is worn; but it will not last for ever. The cloth of
which it is made gradually becomes thinner until holes
begin to appear, and then the coat is worn out, that is,
its utility is consumed. A watch should last far longer
than a coat, and will satisfy its owner’s want whenever
he wants to know the tune , but eventually it will cease
to show the time correctly, and then its utility is exhausted
A few kinds of wealth last so long that their utility appears
to be indestructible ; golden ornaments or diamonds may
thus satisfy the wants of many successive generations of
owners. It is probable that even such things wear out m
the end, but we may say that articles of wealth are of all
kinds, from those that are consumed in a single use to those
that, when once they have been obtained, continue to
satisfy a want for an indefinite period
Now a large part of the life of all ordinary men is spent
in producing and consuming utilities, that is to say, m
producing wealth to satisfy their wants and m consummg
wealth in the satisfying of those wants When, therefore,
we are studying the production and consumption of wealth,
we are at the same time studying a large part of the lives

22 AN INTRODUCTION TO ECONOMICS

of men As Marshall says , 1 “ Economics is a studv_of I
mankind m the ordinary business of life , if oxammos that
part of individual and social action which is most closely
connected with the attainment and with the use of tlio
material requisites of well-being Thus it is on tko one
side a study of wealth, and on tho othor, and more important
side, a part of tho studj of man " It follows that tho
science may bo defined m more w ays than one The earlier
writers defined it in tho way mcntionod m Chapter I > as
the study of Wealth , while tho quotation just givon is
equally a definition from tho other point of mow.

There is no contradiction between theso definitions,
because wealth itself is a thing that can only bo defined
with reference to man Wealth consists, os wo have seen,
of desirable things, that is, of t lungs winch ordinary mon
would like to have, and wo cannot think of wealth without
first thinking of mon, beeauso wealth is made up of things
that men w r ant Tins fact is important m classifying
Economics among the sciences Thoso sciences which aro
called physical in the broad Bonso are independent of the
existence of mankind , to tako our former illustration, if
there were no men m tho world the laws of hydraulics
would still be true, water would flow downlull, and so on.
But the sciences classed as moral (Economics, Ethics,
Politics, etc ), assume tho existence of men as wo know
them, and study man’B actions from various points of view ;
and Economics m particular directs its attention to those
actions which, to repeat Marshall’s phrase, aro “most
closely connected wuth tho attainment and the use of tho
material requisites of well-being,” that is, with tho pro-
duction and consumption of wealth

1 Principles of Economics, I, i 1.

CHAPTER IV.

SOME ASSUMPTIONS

This study of wealth, which is also tho study of a large
part of human hfo, is not an easy or a simple thing, because
life itself is not simple ; wo have to approach it by degrees,
and to simplify tho early stages as much as possible In
order to do this, wo make certain assumptions, tho effect
of •which is to limit tho extent of the subject ; at a later
stag*', when wo have mastered tho subject within these
limits, wo can go beyond them and extend our knowledge
further. In this chapter v o shall explam some assumptions
that wo find it convenient to make, and students must
remember that these assumptions hold good throughout
this work , they must not think that the same assumptions
are made by all writers on Economics, but they must bo
careful to note the assumptions that each writer makes, so
that they may be sure what ho is writing about
In the first place, we aro considering ordinary men and
women. We aro not limiting our attention to people of
any particular race ; wo recognise that one race differs in
many respects from another, but we confine our attention
mamly to tho points in which they do not differ Different
races, for instance, want different kinds of food , some races
want meat and others do not ; we are at present concerned
not with these differences of detail but with the mam fact

24 AN INTRODUCTION TO ECONOMICS

that people of all races want food Different races again
have different ways of enjoying or amusing themselves ,
we are concerned only with the fact that all races want
enjoyment or amusement in some form of other When
we want to illustrate or explain particular features of human
life, we shall as a rule take our illustrations from those
races which are familiar to our readers, that is, from the
races inhabiting Northern India , this doe3 not mean that
we are considering only those races, but that we are using
them as illustrations of human life m general
In the second place, we assume that the human race
is grouped in nations or states with organised governments
Tins is the case over much the most important part of the
world, and we leave out of account those parts of it where
there is no effective government, and where people can
steal and cheat without fear of the police or of the law
courts Governments are of many different lands, but we
are not at present concerned with these differences , their
common feature is that the ordinary man is allowed to hold
property, that is, to own wealth for himself, and that he
can claim the protection of the police and the courts against
persons who try to deprive him of his property
In the third place, we assume that the people are living
in a condition which we shall describe as Industrial [Freedom
this means that ordinary persons are free to choose the
way m which they shall produce wealth and to decide on
the manner m winch they Bhall consume it This freedom
is not supposed to be unlimited, because all governments
restrict it to a greater or less extent, but the restrictions
are exceptional and freedom is the rule Thus, in India,
a man is free to make his living by cultivating the land, or
by working as a labourer, or by keeping a shop, or in
various other ways , he is not bound to work for a definite

SOME ASSUMPTIONS

25

wage, but is free to take the highest wage he can get ; nor
is he bound to sell or to buy anything for a fixed pnce, but
can buy or sell what he likes if he can agree on a pnce with
the other party to the transaction.

There are restrictions on this freedom m India as else-
where. No one, for instance, may distil spirits, or sell
opium, or buy fire-arms, or do vanous other things, without
special permission from government or again, some
professions, such as that of a pleader, can be practised
only by those who have undergone a special training.
Such restrictions as these have to be borne in mmd when
we are considering any of tho special trades, or occupations,
or professions, that they affect ; but after counting up all
the restrictions that exist, we can see that they make little
difference to the economic life of the country taken as a
whole, and that it is safe to leave them out of account
when wo are dealing with the mam course of business, the
production and consumption of food, and clothes, and houses,
and the like

One restriction of great importance to our subject is
found m the laws m force in most parts of India which limit
tho freedom of the landholder in ejecting his tenants and
in enhancing their rent This restriction will be considered
in Book V

Apart from interference by government, Industrial
Freedom may be limited m practice by the customs and
the views of various classes of the people , such limitations
can sometimes be neglected, while at other times special
allowance must be made for them In India we have to
allow in this way for the existence of the system of Caste,
which has an important influence on the daily business of
a large part of the population

In the fourth place, we assume for the purposes of this

26 AN INTRODUCTION TO ECONOMICS

work that money does not alter m purchasing power. We
take the existence of coins, such as the sovereign and the
rupee, as a fact, and we assume that we can measure the
value of other things by the number of sovereigns or rupees
which they cost, in exactly the same way as we measure
weight m maunds and sers, or length in feet and inches.
This is the way m which ordinary people do in fact regard
money, and the need for stating it as an assumption will
not at first be obvious , but later m their course students
will find that the assumption is not entirely m accordance
with the truth, and that in considering economic movements
extending over a long period it is usually necessary to
make allowance for changes that have occurred during
nat period m the purchasing power of money This
necessity makes the argument longer and more complicated
than it would be if a rupee were a standard m the same way
of J”; "f the option is made merely for the sake
n, JZ 7 ’ f ntS Sh ° Uld rememb <* then that the

S m ° ney 18 assumed to be changed

tinctions Sf P £U5SUme that there are dear dis-

two players intn +■„ ' nd ^ 6 °an divide the twenty-

* a sohool

M, the dmtaofaon is Ltso efeLT ^ ^

obviously good and , * some °f the boys are

be bad but be

border-bne beWeeu the Wo Casses

SOME ASSUMPTIONS 27

He can arrange the names of the boys in order of merit,
but the question still arises where m the list he can draw
a line and say that all above it are good and all below it
are bad A good many of the distinctions that have to be
drawn in Economics are of this latter kind , there is no
difficulty in putting most things into one class or another,
but some of the things are on the border-line between two
classes, and their classification is difficult In this first
sketch 'we shall as a rule neglect the things that are on the
border-hne, though they may be of considerable interest
in themselves It is possible, for instance, to discuss at
great length questions such as the exact limits of the term
Wealth, or of the term Capital, and to point to things that
are on the border-hne of any definition which we may
adopt * such discussions are of value because they help
us to be perfectly sure what our definitions mean, but they
can most conveniently be taken at a later stage, and when
students are be ginnin g the science it is wisest to concentrate
their attention on the mam facts, and not to spend much
time m examining the exact limits of the distinctions that
have to be drawn

BOOK II.
PRODUCTION.

CHAPTER V.

THE FACTORS OF PRODUCTION.

Wn have seen in Chapter III that the expression Production
of Wealth means the arrangement of portions of matter
so os to make them more useful, that is, more fit to aatisfj-
some want We have now to examine the conditions under
which this process of re-arranging portions of matter is
earned out.

Let us take a very simple case of an individual who
produces a small amount of wealth in a very primitive
nay We will suppose that a man earns his living by
gathering grass on waste land, and that every day he carries
a load of grass to the market and sells it for money, which
he spends on his food Such a man is producing wealth,
because he is changing the position of some matter, that
is of the grass, so that it will meet the wants of people
living in the town, who desire to have grass to feed their
horses or cows, and who are therefore willing to give some
money in exchangd for it : the grass on the waste land will
not satisfy this want because there are no people there,
and where there are no people there can be no wants ,
it has to be gathered and brought to a place where people
live, and then it becomes wealth because there are wants
which it can satisfy In other words, the man whom we
are considering is producing a new Utility by bringing the

32 AN INTRODUCTION TO ECONOMICS

grass from a place where it is useless to a place where it
is useful If he spends on his food the whole of what ho
receives for the grass, thon he is consuming day by day
as much wealth as he produces, and while thmgs remain
as they are he cannot become richer, that is to soy, he
cannot accumulate any stock of wealth
Let us suppose, however, that he realises that it would
be possible for him to bring more grass to market every
day if he had a reap-hook to cut it with instead of gathering
it by hand He finds that a blacksmith will make him a
hook for four annas, and he calculates that if he can save
one pice a day he will be able to pay for a hook after sixteen
days He decides to do this, and for sixteen days he spends
one pice less daily on his food, and buys the hook at the
end of this time He now finds that he can cut more
grass than he can carry , but that he can carry enough to
bung him in twice as much money as before, that is to say,
that after buying his food he will have something left over ;
he is now producing more wealth than he needs to supply
himself with food

In the present state of India, most grass-outters would
probably be satisfied at this point , they would spend some
of their income on clothes, and would take occasional
holidays, or would buy tobacco or other luxuries , their
income would be larger than before, but it would still be
spent m satisfying their immediate wants, and they would
not accumulate any store of wealth But a far-seeing man
may realise that he has a chance of becoming richer , he
may find, for instance, that he could cut enough grass in
a day to load a pony, and that the pnee of this load would
be sufficient to leave a surplus after feeding both himself and
the pony If then he saves up the extra mcome which he
is earning with the aid of his hook until he can pay the price

FACTORS OF PRODUCTION 33

of a pony, he will then bo the owner of the pony as well
as the reap-hook, and ho will make an income substantially
larger than is required to satisfy his daily wants From
this point it would be open to an enterprising man to
advanco steadily in accumulating wealth , he could now
take a contract for supplying grass to a stable or dairy ,
by borrowing money on the strength of his contract he
could buy moro pomes and hire men to work for him , and
it is conceivable that in process of time he might become
a wealthy contractor, engaged m many other productive
enterprises.

Now let us examine the conditions under w hick such a
man is able to produce enough wealth, first to keep himself
alive, and then to establish a productive enterprise that
gives him an income larger than is required to satisfy his
immediate wants In the first place, there is the waste
land with grass growing on it. If there were no such land
within w alking distance of the market, he could not support
himself in the way that has been described , and when his
enterprise extends, its growth must be limited by the
amount of suitable land within his reach

Secondly, there is the work that he does in gathering
or cutting grass and bringing it to market Nobody would
do this kind of work for pleasure ; he does it because,
though it is unpleasant, it is not so unpleasant as going
w ithout food At a later stage he may pay othei people
to do this work for him , hut the work has to he done by
someone if the wealth is to be produced, and people cannot
be found to do it unless they expect to receive at least a
portion of the wealth that is pioduced.

Thirdly, there is a certain amount of existing wealth,
which is used in producing more wealth, the existing
wealth is in this case first the reap-hook and then the pony

c

34 AN INTRODUCTION TO ECONOMICS

It is true we have supposed that our example starts without
any existing wealth, but a ca«e of this kind is exceedingly
rare even in the most backward parts of India , everyw here
we find that the grass-cutter has his hook, the potter has
his wheel, the carpenter his tools and stock of wood , and,
speaking generally, every producer of wealth uses some
existing wealth m his busmess of production
These three conditions which we have enumerated are
usually spoken of as the Factors of Production, and each
is designated by a short name, the meaning of which must
be clearly understood The first Factor is called Land ,
the second, Labour , and the third, Capital
The meanings attached to these names will be explained
m the chapters that follow , but it is well for students
at this stage to examine some other productive enterprises
with which they are familiar, and seo how these factors

enter into each of them In India, and m most other
countries, the largest share of the wealth that is produced
comes from the cultivation of the soil It is obvious that
the cultivator must have Land , if he does not own it he
may ave to pay a considerable sum as rent in order to
secure its possession It is equally obvious that Labour
is required the cultivator spends most of his time in
P ou 2 2» manuring, hoeing, irrigating, sowing and
harvesting and if the members of his family do not help

w ^ “ SMUj to » “ther l»°Pl° ‘o induce
?X£,r\ h ‘ m Agam - he ne eds Capital, that is,
mn^w f? 18 v 40 em P 1 °? “ production he
‘ff* implements , he must have

put m the 1 f “fr 6 "* 8 ’ he We seed to

teed humelf and his “ 3l °° k ° f f00d 40
crops he has sen, am gro^g and ^

FACTORS OF PRODUCTION 35

Or take an artisan who makes, say, brass vessels m bis
houso in the bazar. He doos not, like the cultivator, need
some acres of land, but still be must have some space to
work in, with room for bis furnace and his lathe ; that is
to say, he must have some land. He must work, and he
may need to pay labourers to work with him . the furnace
has to bo managed, the moulds made, and the rough
vessels to be turned on the lathe, filed and polished Ho
must have capital, too — his lathe and other tools, and the
brass which ho melts in the furnace, as well as some money
to buy food and to pay wages

A large factory requires exactly the same factors of
production, though as a rule m much larger quantities A
cotton-mill or a jute-mill, for instance, must have land on
which to erect buildings It may employ hundreds or even
thousands of labourers , and its capital may be worth
several lakhs of rupees, represented partly by the buildings,
engmes and machines, partly by the stores of fuel and raw
material, and partly by the goods in process of manu-
facture and the sums paid away m wages

A railway may be taken as another illustration of a pro-
ductive enterprise It is true that people may occasionally
be met who argue that a railway does not add to the amount
of wealth, but only moves wealth from place to place , but
this argument cannot be applied to wealth in the sense
m which we are using the word Wealth consists of things
that are useful m satisfying wants, and it is impossible to
contend that the ordinary wants of people can be satisfied
by things which are not within their reach People living
in Calcutta or Lucknow who want fuel cannot be satisfied
by wood while it is lying in the forests of the Himalayas,
or by coal collected at the mines in Bengal the wood
or coal must be brought to the place at which the wants

36 AN INTRODUCTION TO ECONOMICS

are felt before those wants can be satisfied A railway
is a productive enterprise because it changes the position
of matter so as to make it capable of satisfying existing
wants, exactly in the same way as our original example
w ho gathers grass where it is useless and brings it to a place
where people want it and will pay for it Now a railway
obviously requires the land on which it is built j it requires
the labour of large numbers of workers such as station-
masters, clerks, engine-drivers, guards, coolies, and so on
and it requires a great deal of capital in the form of rails,

m uuLiur

engines, carnages, wagons and the like, as well as
forms which need not be noticed at this stage
These examples will suffice to illustrate the statement
t at all forms of production which are of practical impor-
tance require the three factors, Land, Labour, and Capital ;
ut students will be well-advised to make themselves
thoroughly familiar with the idea by examining for them-
e es t e case of those producers w'hose work they can
ollow, and seeing m each case whether all the three factors
anc J Aether there is any other factor that

Th? rT 7? th ° Option given in this chapter
The re t of this book will be occupied in explaining, Lt,

hv Zl'Tl hCS ° th r fMt0re ' and thcr > a® organisation
pro" 3 aK maa0 "° rk •W- - the process of

CHAPTER VI.

LAND.

The term Land, as used by economists, means something
more than the surface of the ground which we see Besides
the surface it includes

V (1) The mmerals found below the surface, such as coal,
Iron-ore, gold, or petroleum, as well as the underground
water, which is by far the most important mineral m the
agricultural regions of India ;

>S{ 2) the water covering the surface, as m nvers and lakes ,
^ (3) the influence on the surface of sunshine, air and ram,
which reach it from above

| ( Th e distinguishing featu re^ of thejhing s classed as lan d

! is that men cannot inc rea se their quantity. No matter
how much a landholder may want coal, he cannot produce
i from his land more coal than exists there by nature , no
matter how much a cultivator* wants sunshine or rain, he
has to be content with what reaches his land by the natural
processes ) Some economists prefer therefore to use the
term Nature to denote what others describe as Land But
the latter term is more generally used, and it is probably
the more convenient , the word Nature has many shades
of me anin g m ordinary use, while Land gives us a definite
idea if we remember that it includes what is below the
surface and what reaches the surface from above.

LAND

39

a particular area specially suitable for production, there is
not, as a rule, room for all the people who want a portion
of it, and then it is let or sold to those \\ ho will pay most
for the pnvilego and this is the chief explanation of the
high cost of land in towns, where land has to be measured
by the yard rather than by the acre

Production (other than agricultural) is as we have seen
largely concentrated in cities or towns, that is, m more or
less defined areas where the houses and other buildings
stand close together , and a short glance at the history
of a few Indian cities and towns will enable students to
realise the importance of situation and of facilities for
communication. We will glance then at the history of
Delhi and Kanauj, Cawnporo and Kalpi, Murshidabad and
Calcutta . students will find it interesting to trace in the
same way the story of the towns and cities with which they
are familiar, using The Imperial Gazetteer of India to supply
them with the facts

Delhi has been the site of a city since the beginning of
history, and we do not know for certain the reasons that
first led to the accumulation of people there It is fairly
safe, however, to infer that its suitability resulted from its
position in regard to the Jumna, which gave an assured
water-supply, and also a means of communication by boat
— and it must be remembered that, until railways were
built, the nver-boats were of the greatest importance
both for trade and for travellers The he of the country,
too, is such that an armed force can control the crossmg
of the river ; and this was always a most important matter
so long as the land of India was in the hands of numerous
independent longs Thus, as the Mah&Vh&rata tells,
Delhi was a capital city in the time of the Pdndavas , and
all over the world it is true that the places chosen by kings

40 AN INTRODUCTION TO ECONOMICS

as their capitals have become centres of production,
because the presence of the king’s court and armies supplies
a market which makes the city a suitable place for artisans
to settle The city was again a Hindu capital in the twelfth
century, and when the Muhammadans conquered its Hindu
rulers they too established their capital there ; and
successive Muslim dynasties maintained, with short inter-
ruptions, their capital in the same locality though they
shifted the actual site on more than one occasion Its
importance as a capital city declined in the eighteenth
century and ceased in the nineteenth but by that tame
the establishment of secure peace in the country and the
opening of means of com muni cation had made it a large
centre of trade, inhabited by enterprising merchants
When railways were built, they naturally came to a city
of such importance, and the facilities they gave increased
the trade further, while some of the inhabitants had the
enterprise to establish factories of the modem type, produc-
ing cotton cloth, flour and other articles of commerce
Thus at the end of the nineteenth century, though there
was no longer a court or a large army, the trade and
industries of the city were sufficient to support a large
population, while its recent selection as the headquarters
of the government of the whole of India will most
probably result in a further development of its industry
and commeice

Kanauj had probably as great natural advantages as
Delhi, at least in early days when the Ganges flowed close
to the city, and nine centuries ago the two cities were of
perhaps equal importance but its decline has been so
great that some students may not even know where to look
for it on the map of India Its decline dates from the
Muhammadan conquest of the dynasty which had esta-

LAND

41

bhshed its capital tliero . the Muhammadans retamed it
as an administrative centre but did not establish a court,
while changes m tlio course of tho Ganges deprived the
city of its former advantages, and, later, the great trade
route established by tho East Indian Railway passed at
a distance from it So to-day it is a small town, distin-
guished only by the extent of ruined buildings in its vicinity,
and by some small handicrafts, especially scent-making,
which have survived from the days when it was an im-
portant centre of industry

Cawnporo has no ancient history, and in tho eighteenth
century was a mere village Its importance arose with
the increase of boat-traffic on the Ganges, as it was the
highest point to which the larger boats could usually ascend,
and early in the nineteenth century it was chosen as a
cantonment When trade was already established, the
railways came, and tho traders w ere quick to take advantage
of them and extend their operations , and at the same time
some factories were started, and their numbers have smee
increased, so that the city has become the chief commercial
and industrial centre in Upper India

Kalpi, ljing on tho south bank of the Jumna, has a much
longer history than Cawnpore. It was an important
fortress and administrative centre in Muslim times, and
when through trade developed on the Jumna the town
became one of the largest ports in India, because much of
the cotton and gram produced in Central India was brought
to the nver at this point As railways were constructed,
the nver lost its importance, and Kalpi sank into insigni-
ficance, though the trade has revived slightly since the
construction of the railway from Cawnpore to Jhansi

Murshidabad first rose into importance in the eighteenth
century, when it became the seat of the government of

42 AN INTRODUCTION TO ECONOMICS

Bengal, bemg chosen probably because of the facilities
for communication by nver Trade developed rapidly,
and the city was described in the middle of that century
as bemg as ‘ extensive, populous and rich as the city of
London ’ By the end of the century its importance was
declining the seat of government was transferred to
Calcutta , the industries which had been supported by the
court diminished greatly, and trade became of httle
importance, so that the population is now only about one-
tenth of what it was a century ago
Calcutta too has a short history Its foundation dates
from the days when the oversea trade with Europe was
bemg established , it was chosen as the centre of this trade
because it lay at the highest point on the nver to which
sea-going ships could be brought , it grew with the growth
of this trade, and its importance as a trade-centre led
to its bemg chosen as the seat of government Large
factories came later, and now m industry and commerce
alike the city is nvalled only by Bombay in the whole of
India

The history of these and other cities and towns of Northern
India indicates that the first condition for their establish-
ment is the possession of some advantages in the way of
communications, which m the past meant nearness to a
navigable river When population began to coUect at
such a place, its selection as the site of a court or centre
of administration so enlarged the market for food, clothes
and other desirable things as to attract many more inhabi-
tants while the departure of the court involved a corre-

StS , Cb f e modorn time * railways tend to do
was formerI r done by nvers, and the new
cities that arc now growing up will usually be lound at
suitable pomts on the railways rather than on the nver

LAXD

43

brink** In the old dav> when industries wore mainly
earned on by artisans working independently, thoir extent
variel rapidly v. ith the swo of the market; artisans
followed the court, partly because of the market winch it
otic red, and partly because of the security which they
enjoyed in its neighbourhood , and when tho court left
a city, many of the artisans left it too Hero too tho
conditions have changed • largo factories with expensive
buildings and heavy machinery cannot bo moved about ,
it is now more difficult to establish industnes in a now
centre, but, on the other hand, industries when once esta-
blished are not likely to suffer from political changes such
as the movement, of a capital They must as a rule be
established m places where labourers can bo had, that is,
in or near an existing town ; but when thoy are at work
the population will stay near them so ns to retain its
employment, and will not os in the past go elsewhere The
chances are, therefore, that tho modem town with a large
part of tho population employed in industries of the modem
tj^pe w ill be more stable than if it depended for its existence,
os the older towns did, on tho caprice of a long or governor.

But it would bo a mistake to think that facilities for
communication and other natural advantages will alone
ensure the establishment of a town m a particular place
Thero are plenty of places on tho Ganges and tho Jumna
where no town is known to have existed , and there are
plenty of places on the railways which show no signs of
growth or development Very much has depended, and
still depends, on tho appearance of individuals with the
qualities which fit them for the establishment of a new
trade or of new industries This subject — the appearance
of tho trader and the manufacturer — wall occupy the
student’s attention at a later period of his course but it

44 AN INTRODUCTION TO ECONOMICS

must be mentioned here as one of the causes that lead to
the growth of towns, because it is very largely the existence
of trade and industry that makes people want land m a
particular position, and thus leads to the keen competition
for every small piece of land that is the chief characteristic
of town-life as we know it

CHAPTER VII.

AGRICULTURAL LAND.

We have seen in the last chapter that the trader, the
artisan and the manufacturer alike cannot be satisfied
by any land that may be available , they want it m a situa-
tion where, they can carry on then business to the best
advantage This is equally true of the agriculturist, but
in his case the quahty of the land is also of great importance,
whereas the townsman is usually satisfied as regards quahty
if he can get good water and keep his land drained Situa-
tion then is much the most important pomt m towns, but
in the country both situation and quahty are important.

One reason why the cultivator is concerned with the
situation of his land is that he wants to be near a market
where he can sell some of his produce A man who has
land close to a large city will grow fruit and vegetables
which he can sell for very much more than wheat or maize
grown on the same land would bring ; out m the country
there is no market for such products, and he will not grow
them Hence there is very keen competition for agricul-
tural land close to large oities, and people will pay for an
acre of it perhaps ten times as much rent as if the land lay
at a distance But even m a village at a distance from any
town the situation is often a most important question.
Some fields can be irrigated from a canal or lake or nver.

46 AN INTRODUCTION TO ECONOMICS

and they are naturally more sought after than fields with
no supply of water Fields close to the village-houses
again are much easier to manure than fields at a distance,
and in addition they usually get enriched by the deposit
of filth ; they are therefore much more suitable for cultiva-
tion than fields at a distance, and consequently people will
pay much higher rent for them
But to the cultivator situation, though important, is
not everything The land must be fit for cultivation or
he will not take it at all, and his eagerness for it increases
with its natural fertility Much of the surface of India
is unfit for cultivation in the hills and mountains large
areas either consist of rock or are so steep that crops cannot
bo grown on them , and in the plains there is much land
that cannot be cultivated either because it consists of
excessively stiff clay or because it is loose, shifting sand
The landholder knows he can get no one to pay rent for
land of this kind For the rest of the land he hopes to
find tenants , but even m one locality the amount of rent
u Inch tenants will pay vanes greatly according to what is
called Fertility A study of Agncultural Science is neces-
sary to understand fully the meaning of this word , and
tho student must be content to know that the amount of
gram that the cultivator can produce depends very largely
on tho nature of the soil ho has to work Some soils are
deficient m particular substances which plants require
for their growth, while others are adequately supplied ,
some soils again readily supply a plant with all the
uatcr it needs, while others have often an insufficient
supply , and it is such differences as these that in the

a SS re g a l° make one piece of land more, or less, fertile
than another

If wo watch tho cultivators of a village at then work,

AGRICULTURAL LAND

47

we shall find that a sort of standard of work is reco gnis ed
by them as appropriate for the different crops grown on
land of about the same fertility. By a * standard ’ we do
not mean that every cultivator gives just the same amount
of work . some will give rather more, and some less , but
the general view of the cultivators will indicate clearly
the amount of work that is considered profitable m ordinary
circumstances Thus, we may find localities where about
eight ploughmgs are considered proper for wheat, while
two or three will be enough for barley, and perhaps twenty
will be required for sugarcane In such a locality a culti-
vator will say confidently that for wheat eight ploughmgs
will give more produce than four, and will also pay him
better If he is asked whether twelve ploughmgs will give
more produce than eight, he will probably assent , but he
will not assent to the suggestion that twelve ploughmgs
would pay him better Now these traditional standards are
the result of experience gamed during many generations, and
they lead up to one of the most important laws of Agri-
cultural Science, which is known as the Lawjof Diminishing
R eturns . This law_ belongs primarily to Agricultural
Science, but it is not less important in the study of Econo-
mics, and students must take some pains to understand
exactly what it means, although without a„ knowledge of
agriculture they cannot realise the mass, of evidence on*
which it is based

As wo have seen, cultivators have learned by the experi-
ence of many generations that it does not pay to do more
than a certain amount of work for any given crop grown
on land of a particular quality more work may result in
larger produce, but the additional produce will not pay for
the additional work In the same way they have learned
by experience that there is a limit to profitable irrigation,

48 AN INTRODUCTION TO ECONOMICS

to profitable manuring, to profitable weeding, and so on ;
more produce can be obtained by carrying these operations
further, but there is m every case a point where the addi-
tional produce no longer pays for the extra cost This
pomt may be made clear by an illustration Suppose that
cultivators of a particular piece of land find they get
fifteen maunds of wheat from an acre when they have
ploughed eight times and irrigated three times A par-
ticular cultivator now ploughs sixteen times, and finds
chat he gets sixteen maunds of wheat as the result That
is to say, eight additional ploughings have secured one
additional maund of wheat , does this pay him 5 It does
pay him if he can get one ploughing done for less than five
sers of wheat, because then the additional eight ploughings
have cost less than 5X8, or 40 sers , but if a ploughing
costs more than five sers, he will have spent more than he
has gamed So if a fourth irrigation yields an extra maund,
it will pay hirq if the irrigation costs less than a maund,
but not otherwise It is calculations of this sort that he
at the base of the standard practices to be found over the
country , cultivators have learned that, taking one season
with another, it does not pay them to do more than a certain
amount of work, because they have come to the pomt where
the extra produce would not pay for the extra work It
is probably not the case that cultivators all over India
carry their work up to this limit in places where there is
not much competition for land they probably stop short
of the limit and might increase their income by working
harder , but in the closely-populated plains of Northern
India it is probable that on the whole cultivators do as
much work as will pay them, though everywhere there are
lazy and careless men who could get a larger income by
working harder

AGRICULTURAL LAND 49

This same fact, the existence of a limit to the amount
of work that can bo done profitably, appears clearly in
another way. When a cultivator is in a position to do more
work, or to spend more on irrigation and manuring, he does
his best to get more land to cultivate, rathor than mcrease
his work and his expenditure on the land which he already
has If he could go on indefinitely securing a proportionate
increase in the produce of his land by giving more work
and spending more monoy, then ho would be content with
the land ho has, and would not be walling to pay rent for
additional fields ; but in fact, he begins to look for additional
fields as soon as ho finds that ho has work or expenditure
to spare, and he does so because he knows that he has
reached tho limit, and that Ins land wall not pay for more

than it is getting already ,

f frhe Law of Diminishing Return is thus stated by3Iar-
BhaUT^An increase in the capital and labour applied m
"the cultivation of land causes tn general a less than pro-
portionate increase in tho amount of produce raise ,
it happens to coincide with an improvement m the arts
of agriculture ” » As this is lie first important Law wtoh
wo have to consider, students shoul um ac ,
point to iv hat was said in Chapter I regar g
of a Lair. A Lair is simply a conclusion ^im tom

experience, and ire have indicate a ’ 0T increase

experience on which this low is foun e evoendi-

in produce wero proportionate to the mcrease in expend!
tJi, then there would be no limit to expense on any
given piece of land ; a man might go on spendmg ; more and
more, and each successive item of m^nditam
him as well as those that had gone be o
is less than proportionate to the expenditure, and thus

* Principles of Economics, TV. m 1-
D

50 AN INTRODUCTION TO ECONOMICS

cultivator sooner or later finds that a limit exists and that
further expenditure will not pay him>

In the law as above stated, there are two qualifications
The first is contained in the words in general These
words, or an equivalent phrase, will be found in many of
the laws of Economics, and indicate that exceptions must
be expected in particular cases , this is m accordance
with experience in every-day life where as we know the
unexpected sometimes happens The exceptions to the
Law are sometimes of great interest and may require study
at a later stage, but for the present it is enough that students
should realise that while the Law is generally true, it is
not necessarily true of every single cultivator or of every
smgle field

The second qualification has the effect of limiting the
application of the law to a period during which the art
of agriculture does not change materially This limitation
is necessary, because a considerable change in the art may
alter the whole relation between expenditure and produce,
and either make it advantageous to spend much more, or
make it unadvisable to spend so much But when the
change has taken place, the Law still holds good the
amount of profitable expenditure has changed, but it is
stall true that there is a limit beyond which further expendi-
ture is unprofitable 1

1 Some knowledge oi the science and practice of agriculture is
required m order to appreciate this qualification It is quite possible,
for instance, that the introduction of improved tillage-implements
m northern India might entirely alter the existing standards of
culti\ ation four ploughings with improved implements might
give the same produeo os eight ploughings done m the style that
prevails at present, and it might then be found profitable to till the
land more thoroughly, giving say six ploughings in all The amount
of profitable expenditure would then be changed, but there would
still bo a limit , it might bo found profitable to plough six times,
while eight ploughmgB would not pay for the extra work or cost

AGRICULTURAL LAND 61

Subject to these qualifications, the Law is supported
by tho expcnonco of cultivators in India, as well as by that
of tho English and French farmers from whose practice
it was originally doducod. It is tho most important
conclusion of Economics regarding agricultural land , we
have not occasion to use it at once, but it lies at tho founds
tion of tho theory of Rent which will occupy us at a later
stage.

CHAPTER VHL

LABOUR

The second Factor of Production is usually spoken of os
Labour This tonn includes all the work done by human
beings, 1 but excludes the work dono by animals Somotimcs
the word is used to denote the work itself, while some-
times it is used to denote the labourers who do tho work ;
and it is best that students should alu ays bear both meanings
of the word in mind, because, w o cannot as a matter of
fact separate the worker from the work
The work done by human beings is of very different
kinds , it is done partly by using the muscles of tho body
and partly by usmg the intellect, but it cannot bo distinctly
classified on this basis because a great many people use
both intellect and muscles, and the work which they do
is the result of both On one side we have the ordinary
general labourer or coolie, who has very little need to use
his intellect, and practically all of whoso work is done
y his muscles , on the other hand, we have merchants

and^e 6 W ntera1)rth6 y s ^ 0 ThaTOS^ 0t pr ° duct, . vo ° f wea,th *

between productive nnri j Ve drawn an elaborate distinction

mJtoLo P v^f£ on tb Bn ™ P , r0duCtlV6 labour distinction

and its discussion deals mS ^tH? 8 J° the word Wealth ’
line , in accordance ? thuigs thafc are on «mj border-

to " ° h,pW 17 •

LABOUR

53

and professional men such as pleaders, whoso work is
done by the intellect and who practically never use their
muscles in production Between theso extremes we have
all the people who use muscles and intellect m varying
proportions, the cultivators, the artisans, and the skilled
labourers, as well as people like copyists whose work is
mainly done by the hands It is convement to begin
the study of Labour with the men who wont wholly or
mamly with their muscles, and we shall take as the simplest
case the labourer who works for hire and uses his muscles

to do the work that ho is ordered to do
The hired labourer is a familiar object both in the town
and in the country , and the first question regarding him
is, Why does he work * It is because he wants wages
to buy food and clothes for himself and his family , that
is, his object in working is to obtain some wealth, by
consuming which ho will satisfy his wants. It is true t at
a man gets a certain amount of pleasure from us ™£
muscles , this is one reason why we play games like hockey
or cncket ; and men may be found, though they are pro
bably rarer m India than m Europe, who will do for pleasure
a certain amount of ordinary coolies work, sue as oS m S
m the garden, cutting down trees, or sawing woo
even the ordinary cooho feels some pleasure m omg
work well and skilfully, just as we take pleasure m a
tuned hit m cncket or a good shot at t e goa in
or football But the fact remains that the ordinary a
does not work for the pleasure of the exertion, ev ® n ,
he may get some pleasure out of it , he is no oun i °
tor J„™ pleasure on days when he has been unable >to
get employment for wages Work is on o u .
pleasant to the ordinary man , he will no go ' ° =

for nothing, and he has to he penmaded to work by offerrn.

54 AN INTRODUCTION TO ECONOMICS

enough wages to induce him to work. The amount of
wages that has to be offered is a matter which we shall
have to examine at some length when we are discussing
Distribution for the present all we can say is that men
will not work for nothing, and that if wo want men to
work we must offer them some inducement
This fact is as true of the cultivator or artisan as of the
hired labourer , he will not work without some inducement
to do so In his case the inducement is not offered m the
shape of a payment for a day’s work, but it is part of tho
wealth which he produces The cultivator realises that
if he sits idle when he ought to bo ploughing or irrigating,
he will have less produco at the next harvest some months
hence, and he works to-day in tho hope of securing that
distant reward he thus looks further into tho future than
the ordinaiy coohe who expects his wages to bo paid at
the end of the day, or at latest at tho end of the month ,
and it is probably true that the ordinary cultivator works
harder than the ordinary coohe The artisan again
knows that if he sits idle he will have less to sell in the
future , and he works because he looks forward to the price
to be paid for his wares when they are finished , part of
that price will be spent on food and other things to satisfy
the wants of himself and his family. So that though the
form of the inducement differs m different cases, this fact
is true of all classes who use their muscles to produce w ealth
they would not do the work merely for pleasure the
work is m itself unpleasant, but they do it because it
enables them to satisfy some of them wants
Inow, if we suppose that the supply of the other Factors
of Production remains unchanged, we may infer for the
moment that the amount of wealth produced in a given
area will vary with the number of labourers, that is, that

LABOUR

65

most wealth will be produced where there are most labourers
engaged in producmg it This inference must, however,
be modified in cases where there are great differences m
the quahty of the labour, because a small number of highly
skill ed men, all working their hardest, may produce more
wealth than a larger number of lazy and unskilful men
and thus, in considering labour as a factor of production
we have to examine both the question of numbers, and t e
question of quahty of the labourers We will take e
numbers first, that is, the population of the country, since
the largest part of the population hves by manual la our
The size of the population at any given time is the result
of various influences . these may be considered as affecting
(1) the birth-rate, (2) the death-rate, (3) emigration T e
birth-rate means the number of children bom annually
among a fixed number of people it is obvious that *
forty children are bom in a year among a thousand people
in one country, and only twenty among a^ t
another country, the population of the is
increase more rapidly than that of ^ 6 seC °° f «_
causes that influence the birth-rate are y no me
known, and their study is not a part of ****** but
belongs more properly to the science 0 P u c j^ ay
is enough for the student to know that the differences may

“Sirs-.— OPPV to the "te ji m

one country forty people die in a year out ol la .

and m another oily twenty die, it is obvious that the Wtcr

will inorease more rapidly in population tha

or if (as is quite possible) both are decreasing, the forme

will deorease more rapidly than the “ r account the
The third influence, migration, takes m
fact ot some people leaving the country and other p p

56 AN INTRODUCTION TO ECONOMICS

coming to it In India as a Mliole it is of little importance,
but it affects some parts of the country, and m some other
countries where special conditions exist it may lend to
very material changes m the numbers of the population
Thus, coantnes like Canada and Australia are at the present
time gaining greatly in population by the largo number of
immigrants (that is, persons coming to live in the country),
while recently some European countries, and notably
Ireland, have had then- population reduced by emigration
(that is, by people leaving them to live in other countries)
While the causes of high or low death-rates and birth-
rates he for the most part outside the scope of economic
science, the causes of migration usually ho within it,
because when people change their country in large numbers,
their object usually is to obtain an opportunity of acquiring
more wealth Other causes it is true have influenced
migration m the past , and students of history will remember
that it was a religious cause that first brought the Farsees
o Bombay, just as it was a robgious cause that brought
toe Huguenots to England But at the present day
large numbers of people do not often change then- country
tom such causes as these people go to countries like
Canada because they can earn higher wages or get possession

* 0h r ply of Europe, just

BuZ bee 'T e0Utt of ““ 8« to Ceylon and

hoZ tT J CM1 8et htgIler ”1™ “"*0 ttan at

m“t intent to th m,Sr ‘* t, ° I “4 causes are of very
grca/D interest to the economist i ■» .

them m the neat chapter taVtoTtST* “ SMd

detailed study at a later s'tage 7 t '“ ther

po™horST, S the h Zs t re onTl, “T , “ fluent ’ ln S

and death-rates, he beyond the scope* toe sTen^ ZZ

LABOUR 67

nusts have tried to state the experience of history as to
the growth of population in the form of a Lair, or Laws ,
and one of these attempts, made by the economist Malthus’
has had so much influence on later writers that students
should make themselves acquainted with it, though they
can hardly appreciate its importance at this early stage
Maltkus concluded from his study of history that the
increase of population in any country tends to be rapid
and contmuous , and that, unless the population is kept
down by some special cause, it tends to increase until
there is a scarcity of food and of the other necessaries of
hfe ; and this conclusion is sometimes stated m the form
of a Law, to the effect that Population tends to increase
np to the limit of subsistence
The full discussion of this Law would involve an extended
study of the history of the world, and at the present stage
students must be content with understanding what it
means In any country, it suggests, the numbers of the
people will ordinarily increase. The numbers may be kept
down or reduced by special causes large numbers of men
may be killed in war or die during a famine, or plague or
cholera or some other disease may cause many deaths
hut if no such special causes occur to reduce the numbers,
a tune must come when the population will be so large as
to require all the food and other necessaries that the
country can produce , and when this point has been
reached a further increase m population will result in an
inadequate supply of necessaries
It is not very easy to think out the application of a Law
kke this for so large a country as India, and its meaning
will be more easily grasped if we take the case of an ordinary
Indian village and see what is likely to happen there Let
ns suppose that a village has sufficient population to culti-

68 AN INTRODUCTION TO ECONOMICS

vate the land belonging to it, and that the people belong
to castes which do not engage in industries other than
agriculture , and let us suppose too that all the produce
of the land is consumed in the village Now what will
happen if the population increases ? There are now more
people to be fed, and the land must therefore be more
highly cultivated m order to raise more food than it has
hitherto yielded But as we have seen in the last chapter
the land yields a Diminishing Return to high cultivation,
and the conclusion seems inevitable that a point must
be reached when it will not yield sufficient food for the
increased population , there will be more food on the
whole, but there will not be so much food for each individual
As things are at present, epidemics of cholera or plague
must be expected from time to time, and these will keep
down the population ; but such epidemics are entirely
preventable, and everyone must hope that, with the pro-
gress of sanitation, they will in time disappear from India
as they have disappeared from most of the countries of
Europe

What happens now m an overcrowded village such as
we have described ? Some of the inhabitants leave it
to take service elsewhere men of the higher castes go as
sepoys or peons, while the low castes go to work in factories,
or on railways, or in the coal-mines But if we suppose
all the villages and towns of the country to be overcrowded,
then the inhabitants of our village will not have this
resource because they will not be wanted elsewhere, and
they must stay in their village where there is not enough
food for them Either then the population will decline
as the result of deaths from insufficient food, or the inhabi-
tants will limit the population m some way or other, bo
that it shall not exceed the number that can be fed History

LABOUR

59

tells us that some communities have in fact found ways
of limiting the population the old people have been
killed or left to dio when they could no longer work, while
the practice of killing off some of the young children was
not long ago common m various parts of India, and special
laws for the prevention of infanticide are still m existence
But measures such as these are no longer permitted by
civilised governments ; and the only permissible means
of limiting the population is the exercise of self-restraint
on the part of the adult men and women, so that fewer

children shall bo bom. . , ,

This was the state of things to which Malthas looked
forward , 1 a time whan the people should so limit the
number of births that the population should not increase
up to the limits of subsistence , that is to say, ins a

1 At the time when Malthas wrote, ^ui^fo^hi^to^OTOSco that
from what it is now, and it w" to»nB qufmtl .

food and other necessaries would bo r P wor ld to the

ties by railways and steamships Item onomde of the w^ ^ ^

other. Ho wrote, tlioreforo, on ^ . ^ 03 t' o f the food which

at the fmo, that each country must I • coant^
it required for consumption hf hose from other countries,
con now get all tho food it needs by p^chose^m ^ ^ ^ {m
provided that it produces enough w a pro( jucos much less

the food which it buys England, , ^ fc jj 0 goods which it

food than it consumes , it P a y° I g r 0 ther fuel to enable it

manufactures But if England had no coal « otn for ^ food>

to manufacture goods m sufficien q . med as at present , it
its 'population could no longer _ oro f 00 d from the land thax
would have to dovoto itself to raw g {ood t0 sup p 0 rt itself*

is now raised, and if it could no emigration The question is

tho population would bo ro J. u °^, b Z od ™f support the population
no longer one of raising 6U ^J C1 sufficient wealth to provide

of a particular country, but of p country like most of India,

by purchase the food that is rcqui produ otion, tho amount of

whore agriculture is the chief m t importance , but oven

food produced is still a mal ttor of might find it pro-

m such coses it is conceivable „ n tton and oilseeds, and buy its
fitahle to produce such things sa i e 0 f these

food with part of the money obtained ior

60 AN INTRODUCTION TO ECONOMICS

a large number of porsons strugghng for a life of poverty
and insufficient food, thore should be a smaller number
able to obtain sufficient quantities of food and other
necessaries and to lead a life of comfort There are many
other considerations affecting this question, which will
engage the attention of students at a later stage for the
present we may lcavo tho subject with the remark that
though particular parts of India are certainly overcrowded
in this sense, India as a whole is not, and that the problems
before Indian statesmen of to-day refer not to limiting the
numbers of the people but to facilitating their more even
distribution over tho country, and to increasing tho pro-
duction of wealth, partly by tho improvement of agriculture
and partly by the development of those industries, for
which the country offers a wide scope, and which would
afford employment and subsistence to what now seems its
surplus population.

CHAPTER EX

MOBILITY OF LABOUR-.

As has been indicated in the last chapter, labourers are
not evenly distributed over India * there are overcrowded
towns and villages, and thoro are villages and towns which
could employ a laigor number of productive labourers
than they possess. In a general way tho distribution of
the population follows tho fertility of the soil, thus the
population is dense over most of the fertile plains that he
along the Ganges, wlnlo it is very small relatively to the
total area in the Himalayas, and also m the hilly tracts
of Central India The usual way of stating the density of
the population is to calculate tho average number of persons
to a square mile , and the census shows that this figure
may vary in tho case of Indian districts from less than
thirty to close on one thousand persons The density, as
w-e have said, tends to vary with the fertility, but this
tendenej’ is by no moans always realised, and the differences
that exist do not rapidly become equalised. Nor does
the surplus population of the over-crowded tracts migrate
at once to places where tho establishment of new industries
offers bettor chances of employment * such migration as
takes place is usually slow’ and partial Thus the factories
m cities like Calcutta or Bombay or Cawnpore may want
many more labourers than they can get, at times when
many labourers in Bihar and the United Provinces can

62 AN INTRODUCTION TO ECONOMICS ,

*

scarcely get enough work to support their families • in
some places labourers cannot be got even at high wages,
while in others there are labourers to spare It is obvious
that in these circumstances the production of wealth is
less it would be if the labourers were distributed in
accordance with the needs of employers.

In former times some of the governments m India, as
well as private persons of influence, attempted to deal
with this situation by forcmg labourers to go where they
were needed , forced labour is still a memory among the
country-people, and it might possibly be found m existence
m some native states even at the present time But under
the British Government of India, the personal freedom of
each individual labourer is maintained as far os possible,
and though landholders may still be found forcmg unwilling
labourers to work in their villages, it is now impossible to
move by force any considerable number of men in order to
make them work at a distance , employers are left to
effect such movements as they may require by the offer
of higher wages and other inducements.

» Some of the earher European writers on Economics
assumed the existence of what may be called complete
( Mobility of Labour , they assumed, that is, that labourers
V would go to work wherever the inducements were greatest,
j almost as certainly as water will flow downhill until it
'reaches the lowest possible level ^ Such perfect Mobility
probably does not exist m any country m the world, and a
considerable portion of later works is often devoted to tbe
study of the hindrances to mobility that in fact exist
These hindrances differ in force from country to country,
and from century to century , but their general nature is
fairly uniform, and their study may be approached by a
glance at the existing position in northern India

(i

MOBILITY OF LABOUR

63

In the first place we must distinguish between permanent
and temporary migration A labourer may either change
his Ihbihe permanently and settle in the place where he has
found employment, or ho may go away to work for a time
only, intending to return to his homo after a longer or
shorter interval. Permanent migration is common in
many parts of the world, and most of the emigration that
takes place to countries like Canada and Australia is of
this type ; but it is very rare in India A good example
of permanent migration is found in the Bengali families
that have come to Upper India and made their homes in
Benares, Allahabad and some other cities, and there are
numerous other examples, but the number of people who
migrate permanently is small relatively to the total popula-
tion Temporary migration is much more common : men
go out to service, or to work on railways or in mines or
factories, usually leaving their families at home, and sending
them money for their support, and such men usually return
to their homes after a longer or shorter period x
C InJCndia at the present time mobility is_ very__largely
jl question of caste and lo cal ity. Men of some castes will
go from some localities~to work almost auyu here in India,
and in their case the degree of temporary mobility is
almost as great as is to be found anywhere in the world
Thus chamars from Jaunpur and Azamgarh are found
working as grooms in almost every town : brahmans and
chhattris of Oudh go to the most distant parts of India to
work as sepoys and peons ; and there are many other
instances of the same kind. On the other hand, the bulk
of the cultivating castes and of the field-labourers are very
slow to move, and if they are driven to leave their village
they go as short a distance as possible,' . Artisans aremnch
more mobile than cultivators ; as we have seen in a previous

64 AN INTRODUCTION TO ECONOMICS

chapter, many of these classes followed the royal courts
m their movements over the country, and numbers of them
will still go from one town to another if they think it will
pay them to do so

Thus, Mobility of Labour exists to some extent in northern
India, and the question arises, why is it that when some
castes in some localities are exceedingly mobile, the men of
most castes are exceedingly difficult to move 7 The full
answer to this must be sought for m the history of the
country, and much of that history has not yet been written,
so that no final conclusions can be drawn, but the informa-
tion that is available seems to indicate that the ordinary
inhabitant of northern India is by nature slow to move :
that the cases of mobikty are exceptional and consequently
that employers who wish to mcrease their supply of labour
should study these exceptional cases, and try to find out
the causes that have led to them, and then try if they can
set similar causes at work

In studying this question, it must be remembered that
most of the population obtains its income by working on
the land The cultivator differs from the artisan in one
very important pomt he cannot carry his means of pro-
duction with him [An artisan with his bundle oftools.and
a bttle money can move to even a distant town and start
work there with little trouble, but the cultivator’s success
depends onbis close and detailed knowledge.of the peculiari-
ties of each particular field of his holding, and„when_he
goes to another holding he has to leave., behind him all this
jdetailed knowledge and set to work_tq_acquire,similar know-
ledge regarding his new fields , jwhile if he goes to any great
distance he has to learn all about a strange climate an d
strange soils, and to grow different crops from those to
which he is accustomed It is fine, therefore, of most

65

MOBILITY OF LABOUR

countries that the cultivator is slow to move, and it is parti-
cularly true of tho Indian cultivator , and since cultivators
foirn the most numerous class of tho population, their habits
of thought influence tho other classes living m the villages,
and tho ordinary villager does not think of leaving lus home,’
and leaves it only vhon ho is either forced to do so, or is
by somo Bpecial inducement to go somewhere else,
ra^fho pressure tho t forces people to leave their village may
no either social- or eco nomio -A man may have to leave his
village if ho gels Jumself disliked by the landholder or by
his brotherhood'j>hhd particularly if ho has been guilty of
some discreditable conduct, In such cases the pressure
may bo called social 'l It may work m different ways
perhaps the landholder may turn a man out of the village,
or perhaps n hen ho has quarrelled with lus brotherhood he
ma y find his life so uncomfortable that he decides to go
elsew here , and in either case he is likely to go to some
town \\ here he hopos to find fnendB Probably this social
pressure is not of great importance from 'the economic point
of view ; that is to say, it does not send very large numbers
of peoplo away from their villages to work in other places ,
hut it accounts in part for tho number of bad characters
who are to be found in large cities like Cawnpore.

' When wo speak of economio pressure, we mean simply
that a man finds ho can no longer make a living m lus ^
village^ This cause too is by itself probably of httle im-
portance in causing labourers to go where they can be of
more use , the men who cannot make a living m their village
are usually worse workers than the rest, and would not be
of great ubo anywhere, while their ignorance of where to go
and their fear of going to a strange place are likely to keep
them in their village, doing such casual work as they can
find, and looking for help to the chanty of their more

66 AN INTRODUCTION TO ECONOMICS

prosperous neighbours (But economic pressure, when com-
bined with special inducements to go elsewhere, is of great
importance, and this combination of influences does in fact
cause many workers to move to places where they can earn
more money Thus a young chattri of Oudh. may find
that there is not work for him on his father’s land, and that
his father’s income is not large enough to support the family *
this is economic pressure, and if it stood alone it might not
cause him to go elsev here But probably he has relations
and fnends in service m Calcutta, or Hyderabad, or Lahore,
or some other distant city, who are earning money and
sending some of it home to their relatives , so he goes to
some distant place where he has fnends, and through their
help gets employment, and presently he too is able to send
home money to his family Or a weaver may find that
he cannot support himself in his village, now that cloth can
be bought so cheaply , he knows that some of his brother-
hood are norlung m the cotton factones at Bombay or
Ahmadabad, and he goes there and gets similar employment
with their assistance 1

The general position then is that people are inclined to
stay at home among their friends, and disinclined to go
among strangers, w hile they are usually ignorant where to
go these conditions are not pecuhar to India, and the

1 A striking illustration may bo found m the cose of the Warora
coal mine near Nagpur In 1872 when the mine was about to bo
made, a man named Bhawam Din Dikshit, who was employed on
the railway near the works, offered to bring labourers from his home
m Itai Bareli to dig the mine He persuaded a gang of men to
come, and when they had dug the mine they found themselves well
off, and Btnjcd on as miners to dig the coaL So long os the mine
worked, there were always labourers from the same neighbourhood,
men coming to a place whero they knew their fnends were doing
well , and when the work of mining had become familiar, thoy
went to other coal-mines also, and considerable numbers of them may
now be found working m the mines of Bengal

MOBILITY OF LABOUR

67

obstacles to mobility of labour all the world over may be
summarised as disinclination and ignorance, though their
extent and importance varies greatly m different countries
The amount of temporary migration has increased largely
m India during recent } ears, and it will probably contmuo
to increase until the supply of labourers is much more closely
adapted to (he needs of employers t ban is the case at presont ,
[One reason for this change is the increase of knowledge
people in the villages are becoming famihar with the fact
that more money can be earned elsewhere, and they are
gradually getting to know the places w here it can be earned ,
m other words, the obstacle of ignoranco is weakening t A
second and most lmpoi feint cause has been the extension
of railways, which lias mado it possible for labourers to
travel quickly and cheaply to distant places where they can
get work A weaver m Oudh, for mstanco, can got to
Bombay in two days, and largo numbers of weavers now
mnko this journey for tho sake of a few months’ work
When there was no railway, the journey might have taken
months, and would have cost very much more than it does
now'. Tins is only one of the man}' w ays m which railways
have added so greatly to the productive power of the
country as a wholo

So far we have been considering one sort of mobility
only, that is o f peop le gomg_to„.workm.anpther. place — but
tbo term mobility covers also tho idea of people changing"
their occupation. Suppose a man who is employed m
making brass vessels finds that brass has become very dear,
or that people will not pay fair prices, or that for any other
reason he cannot make a living by his occupation. Wliafc
is he to do ? One course is, as we have seen, to go to some
other town and start making, brass vessels there another
is to stay where he is and take up some other occupation.

68 AJST INTRODUCTION TO ECONOMICS

Such a change of occupation is possible, and it is some-
times forced on people but it is as a rule difficult in
all countries, and in India it is rendered exceptionally
difficult by the customs of caste The brass-worker may
see, for instance, that the leather-workers in his town are
A pTp in g exceptionally high wages, but he cannot become a
leather-worker This would bB difficult anywhere, because
he would not possess the necessary skill in working leather,
and (as we shall see later on) most occupations require a
period of teaching and training but in India he would not
for a moment think of the change as even possible, because
the rules of his caste would not allow of it. Thus, many
of the occupations which require special skill are closed to
all classes of the people except the single caste which follows
them, and in this way the caste system, which at present
is almost peculiar to India, makes it very difficult to increase
the number of workers in the occupations where workers
are most wanted If a skilled labourer is forced to give
up his own occupation, he can take up only one of the few
kinds of occupation which are not confined to a smgle
caste, usually either cultivation or what is called general
labour, that is coohes’ work

We have said above that even when the system of caste
does not exist, it is not easy for the worker to change his
occupation The course a man takes when he is free to
choose is to put his sons into the occupation that seems
to offer the best prospects A mason, for instance, may
either bring up hiB Bons to be masons like himself, or he
may get them trained for other occupations — one a metal-
worker, another a shopkeeper, another a schoolmaster, and
so on In this way the choice made by parents tends m
the long ran to supply workers to the occupations where
they are most wanted, because parents choose for their

69

MOBILITY 01 ? LABOUR

t. W

>«

sons those occupations where the wages and other induce-
ments are most attractive The adaptation is by no means
perfect, because while the boys are being trained the
conditions of production may change, and there may be
much less need for their work when they have grown up
than at the time the choice was made Even m Europe,
therefore, workers are not as a rule distributed just as they
should be so as to secure the largest production of wealth ,
at any given time some occupations want more workers,
while in others there are too many in the first case some
other factors of production are insufficiently employed for
want of labour, and in the second some workers are in-
sufficiently employed and have to waste part of their
time in idleness The want of adaptation between workers
and work is probably greater in India than in European
countries, because of the special hindrances of the caste-
system , not only are workers unable to change their
occupation, but they cannot choose occupations for their
sons, who are equally bound by their caste We shall see
later on that this want of adaptation is of great importance
in Distribution , at present we are concerned only with its
influence on Production, where it is certainly harmful^
causing an excess of workers m some occupations, while m
others the want of workers is the chief limit to the quantity
of wealth produced The means of securing closer adapta 4 -
tion is therefore one of the large economic problems before
the country . we cannot discuss it here, but students will
have to pay serious attention to it later on
Before leaving the subject, it is well to say that the
caste-system is by no means an unmixed evil, even from the
point of view of Production We shall see in the next chapter __
that it is of considerable value in seeming the training -of -
workers^ and thus maintaining the_quahty~oL.labour

CHAPTER X.

QUALITY, OR EFFICIENCY, OF LABOUR.

So far ve have been considering the quantity of labour,
that is the number of ■workers available for productive
purposes we have now to consider the other mam factor,
the quahty of labour Common experience shows that
there are very great differences among workers, so that
employers choose one man instead of another, and sometimes
one race or caste in preference to others who would be ready
to do the same work these differences may be classed as
ansmg from (1) health and strength, (2) skill, (3) moral
quahties

We have seen that manual labour .means. primarily the
use of the muscles of the body and it is obvious that men’
who are strong and healthy can do more work, and so aid
in the production of more wealth, than those who are weak
and sickly The quahty of strength seems to depend
partly on race and partly on training in childhood it is
difficult to separate these two conditions beoause the races
that are strongest are usually those where the children lead
a healthy and active life, and we cannot yet say with cer-
tainty how much of the strength is due to inheritance and
bow much to training But the existence of the difference
is well known Panjabi labourers, for instance, can do
more work than men from Oudh, and Oudh men can do more

QUALITY, OR EFFICIENCY, OF LABOUR 71

than Bengalis But the maintenance of bodily strength
requires also a sufficient supply of nourishing food, and a
half-starred man can rarely do a full day’s work hence
good a nd suffi cient, food is an important condition of
Production 1

But a man may be naturally strong and may be suffi-
ciently fed, and may yet waste much of his worlang time if
he suffers from fever or some other disease that keeps men
away from work for prolonged periods.. We have seen that
improved sanitary conditions would be a material aid to
Production, because they would lover the death-rate and
thus leave a larger population at work at any given time
but they would be even more valuable in India if they
could secure a large reduction in the amount of sickness
due to fever We all know in a general way that a piece
of work may be very much delayed because many of the
labourers have fever, but it is only the employers of many
labourers who can realise how great a hindrance this loss of
time is to Production Thus, the improvement of sanitation
is most important from v our present pomt of view , not only
because it will keep more labourers alive, but because it will
keep many more labourers m good health and fit for work)

The next difference which we have to consider is in skill
Skill depends first of all on the muscular movements which
constitute manual labour Every student who has played
games or done gymnastics knows that a movement of the
muscles which at first he finds difficulty in performing

1 Thm point will require further consideration in connection with
Consumption and Distribution In the meantime the statement m
the text may be illustrated from the experience of famine-relief
Labourers who come to relief-works are rarely able to do the
full day’s work of an ordinary man, and the task set to them as
the condition of their receiving the daily wage has to be carefully
graduated so that it shall be reasonable with regard to the physical
condition of the workers

72 AN INTRODUCTION TO ECONOMICS

becomes gradually easy 'with practice at first ho has to
perform it slowly and painfully, and must think of nothing
else , but gradually it becomes easier, and he can perform
it more quickly and certainly, until at last ho need scarcely
think of it at all, but can go through a complicated senes
of movements almost automatically An experienced bats-
man, for instance, has not to stop and think how he is
to move his legs, his arms, Ins vmsts and his shoulders in
order to play a particular land of ball he recognises the
kmd of ball almost as soon as the bowler delivers it, and
he makes the appropnato movements without thinking
further , if he had to thmk them out, he would probably
be bowled before he had finished thinking The movements
made by a labourer at work are exactly the Bame in land
as those, made by a youth at play he needs practice in
them until he can perform them quickly and accurately
without stoppmg to thmk about them, and people watching
a skilled workman are apt to thmk that his work is quite
easy because he seems to do it so easily. The work of a
potter, for instance, looks exceedingly simple he spms his
wheel, throws a lump of clay on it, presses the lump for a
few seconds with his hands, touches it with a knife, and then,
as the wheel comes to rest, takes off the jar or cup which
he has made and puts it with others to be baked But if
a spectator offered to take the potter’s place, he would soon
find himself in difficulties , it takes skill even to spin the
wheel at the proper pace, the lump of clay will fly off if it
is not thrown exactly in the centre of the wheel, and an
u n s ki lful touch will either knock the clay to pieces or pro-
duce a shape quite unlike what is intended The same
thing is true of all manual labour the muscles concerned
must be practised until the required movements become
a habit

QUALITY, OR EFFICIENCY, OF LABOUR 73

Use cliicf \aluo of the cnstc-system from the pomt of
view of Production is that it gives this practice while the
[« tur SJrprl:cra are *nll boys The potter’s son has watched
ii,c fat ^ er at ^ rorJl from the time he could walk , he looks
forward to doing the same work all his kfo, and when he
begins to try it his father is beside him, showing him exactly
how to make the neccs^n movements The same object,
training and practice m the required movements, is, m
some other countries, recurcd m part by what is known as
the apprenticeship system, under which a boy is placed
under ThePordcrs of a workman to learn his occupation ,
but the ordinary workman cannot be rcbed on to take as
much trouble over training an apprentice as the father
takes with his children , and probably this kind of skill is
ftt least as common in India as anywhere else in the world,
just because of tko careful training which the workmen have
received from their fathers whilo they were children.

This control ovor certain movements of the muscles,
acquired by long practice, is the foundation of all manual
skill. The higher kinds of skill consist partly m control
over a larger number of movements, and partly in the
exercise of judgment (also acquired by practice and ex-
perience), which enables a man to decide at once what
particular movements are most suitable to the material
on which ho is working and to the object of his work
Thus, the ordinary potter is practised only in the movements
required to make a few common objects such as cups and
jars, and if ho is given a pattern of some unfamiliar shape he
w ill make many mistakes at first, and it will be some time
before he can copy the pattern correctly. A more highly
skilled potter knows how to make many more objects,
and with his wider experience he can copy a new pattern
more quickly, and with fewer mistakes An ordinary potter

74 AN INTRODUCTION TO ECONOMICS

again knows only the movements required for the clay with
which he has always worked , and if he goes away to a
place where the clay is rather different it will be some time
before he can u ork with it The more highly skilled potter
will have a much greater experience of different sorts of
clay, and as soon as he recognises any particular day he
will know what to do with it So again, he will know
much more about colouring matters and how to use them,
and can produce cups or jars of the colour he wants, red,
or blue, or green, while the common potter can only produce
the ordinary red to which he is accustomed

Up to a certain point , the caste-system secures this
higher skill, because the father teaches his” sons all that
he himself knows, and so knowledge once acquired is passed
on to the next generation The defect of the system is
that it gives little scope for acquiring increased skill the
father cannot teach more than he knows, and the son learns
only from his father^ Now at the present time there is
in India need for higher skill m almost all the work that
is done in the country This need is caused by the progress
of the people generally m wealth and in knowledge people
want a larger variety of things, and they want things which
their fathers did not know of , and at the same tune new
materials are available, and also new tools The artisan
should be able to use these new materials and new tools
so as to produce the new things that are wanted but he
learns only from his father, and his father knows nothing
about these things So the artisan often goes on making
what Ins father made, while the people buy things made
m other countries, and have less money to spend on what
is produced in their own town , it is thus the artisans as
a class who suffer for their own ignorance The remedy
for this evil has to be sought m some scheme of industrial

QUALITY, OR EFFICIENCY, OF LABOUR 75

training, which shall enable the young artisan to work
with new nnto-ipls, new tools and new designs as well as
ki« Cither work* with the old, and the industrial schools
which are now being opened in some cities are attempting
to work* out scheme** of the kind so that the next generation
of art is an v shall bo at least as able to meet the new needs
os the last generation was to meet the old requirements
The foregoing illustrations of the meaning of skill have
been drawn from the work of artisans, but precisely the
same considerations apply in the caso of agriculture
Skill, that is to say practice and a certain amount of know-
ledge, is required by the man who drives a plough or a cart
or who sow*, or reaps, or irrigates, or we , an ^
is acquired in a very high degree by the cultivator s chi dren
ns they help their father and learn from him But the
art of agriculture has to move with t o tunes, jiu ^
handicrafts must move : new crops have to be & ’ ^

old crons given up , new methods, new too ,
tap—L required m order to «<™
possible production from the land and
cannot teach hie sons about these tbmgs, nhich he docs

not know bimself. And so arises e nel ^ cjuldren the
of education uhich shall teach ‘ ° ™ ’ ^tcrionng with the
new know ledge they require m, m b 0 th

training they receive

the mam branches of productio , q means

skill is at the present "LX^ut

of enabling the young to cmpl y b the existmg

sacrificing the practical training p

institutions of the country. dualities as

; By the term Moral Qualities are of

honesty, regulanty, diligence, an > Production'

much importance from the pomt of view

76 AN INTRODUCTION TO ECONOMICS

A labourer may work hard and steadily without being
constantly watched, and he will obviously do much more
work in a given time than another who works slowly and
lazily, and lays down his tools directly his employer’s baok
is turned Some workers again can be trusted with valu-
able materials, such as gold or silver, while others must be
watched closely all the time, or they will steal some of
the materials for their own use The science of Economics
cannot indicate all the conditions under which such qualities
as diligence and honesty may be expected some of the
most important conditions must be looked for m the past
history of the people, m the training which they give to
their children, and in the views of religion and morals
that are current among them but there is one economic
tendenoy of great importance that must be considered
in this connection It is concerned with the effeot of the
reward offered on the quality of the work done.

We know that we can usually get a man to do better
work if we offer him, in addition to his ordinary wage, a
small extra payment depending on the quality of work
he does , and the extra value of the work may be worth
considerably more to us than the amount of the extra
payment This is the simplest case of the tendency we
are considering , men will do better work for a higher
payment, and an employer can, within certain limits,
increase materially the production of wealth by raising
the wages which he payB But the limits to this mcrease
are of great practical importance , as we know, the muscles
get tired when used for long, and the whole body gets tired
too , and when a man goes on working with tired muscles
and a tired body, the movements which he has to perform
are not made with the proper speed and precision, and the
work ib badly done, just as a good bowler cannot bowl

QUALITY, OR EFFICIENCY, OF LABOUR 77

well when he is tired. The reward offered should, therefore,
be sufficient to make men do their best work without
over-working themselves . and it is one of the employer s
most difficult functions to adjust the reward accurately

bo as to meet this condition

The tendency which we are considering thus applies to
hired labourers only within certain limits its influence
is much greater in the case of artisans or cultivators
who are their own masters, and receive all the a faona
wealth which they produce by working better is
found as a matter of experience that these classes, token
as a whole, maintain a higher standard of work t an e
labourers ; but to ensure this result it is essential that th y
should have confidence in being able to keep a
have earned The artisan will not work jus ^best if he > knows

that his earnings are liable to be carrie o y 10 V.
by the officials of an arbitrary government, and, t
cultivator will not work his best if he ows
extra profits are to be taken from kim y a j e
whether as rent or otherwise We thus come aQ(J
subjects of the advantages of efficient gove ’

equitable Tenancy laws, questions w ° ^ preS ent all
have to consider later m their course , e a most

that can be said is that these ins ^ WQrk done by
important influence on the quality
most of the producers of the country. labour as

Economists usually speak of. the ^

Cheney ‘ By this word they to

duced by a certain amount of lab Abject 0 f every

the cost of the labour expended, an 1 ^ tk e labour

employer to secure the maximum e ci ^ other

for which he pays . he has to offer suchw^ ^ ^
inducements as will ensure that

78 AN INTRODUCTION TO ECONOMICS

best, that they do not w aste their materials, and that they
do not spoil the tools and other appliances which ho supplies
He has to think too of the conditions under which the work
is done, because men cannot do their best work in hadly-bt
or badly-ventilated rooms ho has to think of the sanitary
conditions of his -workshops, m order to secure the health
of his workers and in many cases it is his interest to spend
money in training children so that they may become
efficient workers later on The management of labour is
thus one of the most important functions of the employer
All text-books on Economies deal at length with a subject
termed Division of Labour Logically it should be con-
sidered at this point of the study, but some knowledge of
the meaning of Capital is required for a proper under-
standing of the subject, and we shall postpone its discussion
for the present, and pass on to the higher branches of Labour
which we may call intellectual work

CHAPTER XL
INTELLECTUAL WORK

In Chapter VIII we pointed out that the work done by
human bemgs is done partly by usmg the muscles and
partly by using the intellect. We have described some of
the most important conditions affecting the amount and
the quality of manual labour, and we have now to see
how far those conditions exist also m connection with
intellectual work

The classes of the people with vhom we are now mainly
concerned are government servants, members of the
learned professions, merchants, and employers of labour
The feature common to the work done by all these classes
is that it is done mainly by the intellect, and that t ere
is little need in it for usmg the muscles In India at the
present time popular opinion would not class all these
workers together , the government servant, for instance,
is still regarded as something altogether superior to the
merchant , but from the economic point of view both fa
into the same group, because they do work of the same

kind , , ,

We have seen that since most of the population of the

country supports itseif by manual labour the number of
labourers depends mainly on the number of the pop^ion.
This consideration obviously cannot apply to intellects.

80 AN INTRODUCTION TO ECONOMICS

-workers, -who form only a small proportion of tho whole
The number of thcso worker? depends mainly on the state
of development which o nation has reached a backward
nation with little trade has room for a comparatively
small number, and tho proportion rises with tho increase
of commerce, industry, and learning Apart from this
fact wo shall find that, speaking generally, tho same
kind of considerations apply to intellectual work and to
manual labour

As regards mobility, intellectual workers are, in tho
presont condition of India more freo to move tlmn manual
workers A pleader or merchant can move lus business
from one town to anothor at least as easily as an artisan ;
and he is rathor more bkoly to do so, bccauso hn> wider
knowledge will show him wlioro tho best opportunities for
working are to he found But even a pleader or merchant
is by no means entirely free Like other men ho would
prefer to stay where his familv lives and if ho goes to a
distance he sacrifices what wc have spoken of as Ins practice
or his good-will, and has to make a fresh start among
strangers The employer of labour is, m addition, often
hampered by tho fact that ho owns buildings or machinery,
which it would be difficult or impossible to move Mobibty
from place to place is therefore by no means perfeot among
tho classes which wo are considering, whilo change of
occupation (tho other kind of mobility) is rendered very
difficult by the amount of special training required by most
of the professions A pleader, for instance, may become
a government servant or a merchant, but unless he takes
a long course of study, ho cannot set up as a doctor or an
engineer In these occupations special training is so
important that the numbers of people engaged in them are
determined very largely by the choice made by youtbs or

IXTEU/iXT UAL WORK

81

hy thei- p,\r> i*i*>. A vuuth decide* (or hi*t parents decide
f^r him) that h** Mil} lx* *v pleader or a doctor, for instance,
'ind if he *x'c&'^U m qualifying for (ho profession w Inch
l*o has eleven, h#» then chooses the town where he will
«i.*vrt praeitc*. This latter choice is determined partly hy
tV r*xvm tint ex»-t-» for more pleaders or doctors in Ibo
v triena uw\ i\< of vhseh ho has knowledge, and partly by
hi* j*iatienri.if> or connection with persons of influence
who can help him at the a tan. ■</

The limns imposed by caste are leas rigorous in this
cr-* j « than with manual labour A pleader’s sons need not
neve* -inly b** pkwlrrs, but may lie doctors, or merchants,
or tca»*he* , a, or government servants, and owing largely
to this fort, the «e'«t* of different localities for the different
for:* of intellectual work are met with n reasonable degree
of ci -Santa : but at the same time, habit and {atmly
indtfum count for a greit deal, and at the present day
there m in doubt that the production of wealth m India
h nnoudy hindered by the fact that so many of Uio best
intellect*, of tho countin' are devoted to a few* of the pro-
and that so few of them engago in production as
employer* of labour And the fact must not bo overlooked
that m practice intellectual work is still confined almost
entirely to a few of tho higher castes * tho professions aro
in theory open to all, hut tho children of tho lowror castes
rarely obtain enough education to enable them to think
of a professional career, whilo oxistmg social prejudices
would make it very hard for them to attain success
Turning to tho quality of intellectual workers, wo find
(hat. efficiency depends on tho same three groups of causes
as in Iho case of manual labour Where wo look mostly
for musclo m llio labourer, wo look for intellect m tho
brain-worker ; and m neither caso do wo yet know with

F

82 AN INTRODUCTION TO ECONOMICS

certainty how to increase the supply m a nation or other
community. In this case skill comes from training the
intellect instead of training the muscles, and this training
of the intellect is the mam object of u hat we call general
education A youth’s intellect is first exercised or practised
by the study of languages, mathematics, tho sciences,
history, and so on, until its functions have developed,
and he then, as a rule, has to pursue a further period of
study in the art of the particular profession which he has
chosen— in other words, he must go to a training college
for pleaders, or doctors, or teachers, or must pass through
a penod of training m a merchant’s office or a factory.
Training for intellectual work is consequently, as a rule,
a longer and more expensive process than training for
manual labour, but m essence the two are alike

quahtles - ^ affect efficiency are funda-
mentally the same in both cases , diligence, vigour, and

nWd 7 “ necessar y the magistrate, or the

Indlho Z, T.u ' M 40 fte “outer or artisan
and the nature of the reward expected hue agam a stiW

tZZZl Ma — -IT oftte worte

ZZ,Z’ 7Tj marW Moreneea of degree in the

theZSZ * *° W ° rk f0r ltee “' tbe attitude of
to respe0t ma ? 8u bstontiaIly affect produc

oxpenenZ aeLe'SstoctaTd 11 “ th ° 7° rld that io
5 ~ of the facta of Z,° ^.Tafdl, '*“1

itxr nzrn r £ o«

he hZdo ^wort ^ ““
takes pnde m doing bs work well £it 8 aweep®

labourers do not nerhm. »i , , T “ lowest olasses of

Porbopa tlunk about this satisfaction,

m'ULLFCTUA L WOK K

83

but they fe*l it, and thf\ nro oi^nttsficd with work which
foil' U’Vv (heir standard ; and when we consider the
luster grade of int< Ikcnna! work wo find (hat the desire
to vn a high * tandatd exeiiH*s n verv strong influence
ovi * the worker., and that it-, exv tence has a material
effect e*i the quality of the work done This desire for
i x cello rn* h prohahlj <■ t rongc-t among the classes engaged
in whn* ore Intvvm as artistic pun tuts, such ns writers
e- jMnte— or roulptors, and with than it may even bo
the i Hud motive fur work, while the money they will earn,
or evtn the fame thev will secure, enters little mto their
thoughts Doctors again will often be found to treat a
paujmr who can pay no fees with the same care and dih-
C»nce (hat thry would five to the cm e of a rich man
th'" bf-t te ichor* aie very little influenced by the amount
which thev earn by levelling, and men engaged m scien-
tific trrearch constantly sacrifico their financial interests
to the pa? ion for their work In such cases as these tho
pati*f.ictio*i that results from the attainment of excellence
i? clearlv foen, but it is pin the «amo kind of satisfaction
that the ploughman feels when he drives a straight and
even furrow, or that the potter feels when ho shapes a
jar evf *dy and correct !v out of wcll-propared clay
Tim economist is interested m Ibis fact, that peoplo
feel sati-faetion in doing good work, because tho mainten-
ance of this feeling has an important mflucnco on Produc-
tion Thing 11 that nro well made will satisfy wants better
than tilings that are badly made, and are therefore of
more value as wealth, and so the production of wealth
i« greater when tho articles produced arc such as to givo
satisfaction to their producer than when tlioy nro badly
made and hurriedly finished so us to bo sold as soon as
possible. The conditions under which work is carried on

84 AN INTRODUCTION TO ECONOMICS

may thus have a material influence on the quantity of
wealth produced by that work Take the case of a silver-
smith who is accustomed to give his very best work to
every article that he shapes, who takes pride in. the ex-
cellence of his work, and who will not ofler for sale any-
thing that falls below his standard of excellence Then
consider the same man when, for any reason, he got into
debt, and finds himself bound to work for a merchant
who has no appreciation of artistic excellence, but wants
only showy thmg a which he can sell to purchasers who
do not know good work from bad The workman must
obey his master, but he will no longer get satisfaction
from his work , he is not domg the best work of which
he is capable, and some portion of his productive power
is being wasted More than this, as time goes on he
gets accustomed to the new conditions, till ho can no
longer turn out really good work, nor would he care to
do so if he had the chance In such cases the waste of
productive power may he very great, whether it be that
of a silversmith working for such a master as we have
described, or of a teacher serving under authorities who
place no value on good teaching, or of an imaginative
writer compelled to do the daily work of a low-grade
newspaper , and the point is of particular interest to
Indian students, because the decline of the old artistic
industries of the country is due in large part to the employ-
ment of the best workmen on mf enor work

We have seen m this chapter that, though there is a
distinction between manual labour and intellectual work,
the same sort of considerations apply to both classes
regarded as factors of Production , and it is of great im-
portance to realise that the two classes are to a great
extent interchangeable, and that the tendency of the

INTELLECTUAL WORK 85

work! is towards an increase in tho amount of mtellectual
uork and a reduction in tho amount of manual labour
This tendency has hitherto had such httle effect m India
that Indian students are apt to bo puzzled by tho attitude
towards Production - adopted by some European writers,
in whoso books manual labour receives comparatively
little attention; tho change depends largely on two
processes — the introduction of mechanical power, and tho
mtroduction of machines

By mechanical power is meant tho employment of
engines driven by steam or oil, or by some other source
of power, in place of usmg tho muscles of men The
first step in this process was to make animals work a
pair of bullocks yoked to a plough or a cart can do as much
work as a largo number of men usmg only their muscles ,
and tho employment of cattle and horses thus economises
in the aggregate an enormous quantity of manual labour.
In tho same way, a locomot ive engmo can do as much work
as a great many pairs ~of~ bullocks • a goods tram drawn
by one engine may carry 12,000 maunds of produce or more,
a load wluch would require several hundred bullocks to
move, and it can move this quantity much more quickly
than tho bullocks could move it One engine therefore
does work that would require the muscles of an enormous
number of men, and it is safe to say that the work now
done by engines on the railways of India could not pos-
sibly be done by manual labour, even if the whole popula-
tion of the country were employed in carrying goods
' Apart from tho railways, m many parts of India there are
as yet few examples of tho use of mechamcal power , but
tho number is rapidly increasing, and many students must be
familiar with jute mills or cotto n mi lls, with cotton gins
and presses, with flour mills, with pumps_for water-works.

86 AN INTRODUCTION TO ECONOMICS

and with various factories where most of the hard work
is done by engines driven by steam or oil
The second process is the introduction of machines
We have seen that manual labour is done by movements
of the muscles, and that its chief effect is to alter the
position of t hin gs Now it has been found by experience
that machines can be constructed which will perform most
movements similar to those effected by the muscles
m ach ines will make most movements at least as accurately
as men, and certainly much more quickly if they are
driven by mechanical power , and such machines now do
most of the work of the world, though in India they are
still comparatively rare

Take as an example the simple case of the operation
known as ginning cotton, which separates the fibre from
the seeds on which it has grown This was formerly done
entirely by hand women or children pressed the seed-
cotton between two rollers with one hand, while with the
other they turned a wheel which kept the rollers moving,
and the rollers tore the fibre aw r ay from the seed Ginning
by hand may still he seen m some places, but in nearly all
the tracts where cotton is an important crop, the work
is done by machinery, and the cultivator sells his seed-
cotton to the owner of a factory A machine-gin is just
like a hand-gm, except that the rollers are much larger
the difference is that the power that moves them is obtained
from a steam-engine instead of from the muscles of human
beings In the same way most of the cotton is now spun
into yam by machines worked by power, and much of the
yam is woven into cloth by power, though hand-looms
are still to be found working m most towns

These two processes — use of mechanical power, and use
of machines have in some countries, and particularly in

INTELLECTUAL WORK

87

England, advanced so far that (except in agriculture)
comparatively little work is done by hand Most of the
wealth produced in England is made in large factories
similar to those that can be seen in Calcutta, or Bombay,
or Cawnpore, and consequently English writers regard this
as the ordinary condition of things The same processes
are at work in India, and, so far as can he foreseen, they
are likely to extend until hand-labour, such as now pre-
vails, ceases to be important in the towns, and diminishes
in importance even in the villages In regard to labour
then India may be regarded as approaching gradually to
the conditions which prevail in Europe, though stall very
far from those conditions. It would take us too far to
indicate in detail the effects which this great change may
be expected to produce, both m regard to the production
of wealth and in regard to the welfare of the labouring
classes Speaking in general terms, it is almost sure to
result m a great increase m the production of wealth,
and also in an mcrease in the welfare of the producers ;
but during the period of transition labourers trained on
the old lines may suffer great hardships owing to the loss
of their means of employment, and one of the chief sources
of interest m studying the industrial history of Europe
must be to ascertain how these hardships were felt m other
countries, and how they can be avoided or mitigated in
India At the same time, students should realise that this
change is not inevitable though its occurence is probable :
we shall return to this point m a subsequent chapter.

CHAPTER XII.

CAPITAL v/

It is now tim e to consider the third factor of Production,
which is commonly spoken of os Capital^ 1 We have
already indicated in general terms what this word means .
i it covers the materials a man has for use, the goods ho has
ready for sale, the tools and machinery which he uses,
and the money which he employs in paying wages and in
other expenditure incidental to the process of production
which he is carrying out Different writers have given
rather different definitions of the word, and m this case
agam it is necessary for^a student to make quite sure what
is meant by each writer whose books he reads As a rule,
however, he will find (1) that Capital is a part of Wealth,
and (2) that Land (in the sense explained m Chapter VI )
is excluded from the idea of Capital Capital then is part
of wealth other than land, and we have to distinguish
wealth that is Capital from wealth that is not Capital
The simplest way of making this distinction is to consider

1 The older word for Capital was Stock, and students will find it
used by Adam Smith m The Wealth of Nations It is still used in
some forms of business we speak of the stock (hve-stock and dead*
stock) of a cultivator’s holding, and of ths stock-in-trade of a mer-
chant, such thmgs forming a largo part of the capital of these classes
But the word Capital has gradually superseded Stock in ordinary
business use and also m writings on Economics

CAPITAL

89

tlio intentions of the person who possesses wealth r it is
Ca pital if he Jn tends .to use it for the production of wealth ,
if he does not so intend, it is not Capital, though it may
at any time become Capital if his intentions change 1 So
that wo may define Capital with sufficient accuracy for our
present purposo as all wealth (other than land) which is
intended to be used for the production of wealthy At a
later stago students will have to consider the difficulties
that arise with this definition, as with others that have been
proposed, but for the present it is enough to say that,
while questions can always be raised about the exact
limits 1 of Capital the description given apphes quite
clearly to practically all the Capital that exists m the
world.

The exact meaning of this description may be made
plainer by a few illustrations in addition to those already
given m Chapter V. We have seen there that a cultivator
uses a good deal of Capital, consisting partly of wells or
other land-improvements, partly of his cattle and imple-
ments, partly of lus seed-gram, and partly of the money
or gram that ho uses to maintain himself and pay the 1 '
wages of his labourers. T he que stion may be asked Is allK
the gram stored in a cultivator’s house Jo be regarded. as ( H
liis Capital ? Tho answ er is that it depends, on, the jpurpose*
for winch fie i nten ds the grain_ Jf_itis_to jeed himself and'
his cattle, or to pay wages to labourers, or to be used as !
seed, it is Capital, if it is to bo given away in chanty, it is
not Capital And as nearly all cultivators give away somq
of their store in chanty, a certain proportion of the, grauji
storeoTby "them is not Capital

1 On this point students may be reminded of the romarks in
Chapter TV regarding the nature of many of the definitions used
m Economics

90 AN INTRODUCTION TO ECONOMICS

i To take another illustration Suppose a landholder has
a lakh of rupees in his treasury is this Capital 2 It is not
-Capital if he merely means to keep the money hoarded :
it is Capital if he means to employ it in production, say,
by lending it to his cultivators to enable them to buy seed
and cattle , and he can make his hoard into Capital by
the simple process of deciding that he will employ it for
production j

In the same way it is possible to give a direct onswer
to almost any question whether a thing is Capital by con-
sidering the purpose for which the thing is intended to bo
used , and students can easily make themselves familiar
, with the idea of Capital by discussing from this point of
view the things that they see around them in the city and
!in the country

Now, at the present day practically everyone m India
who is produemg wealth uses some Capital, though the
amount used by individuals differ enormously In the
illustration of the grass-gatheror, which we used in Chapter
V , we supposed, for simplicity, that at first he used no
tools of any sort, but it would be impossible to find a man
m that position, except among some of the forest-tnbes
m the most backward ports of the country , even the
water-earner has his water-skin, and the sweeper has his
-broom ( Capital then is not only a factor._of. production,
. '> hut a ne cessary "factor People cannot produce wealth
without it, aiicLthis is even more true of European countries,
< which have made greater industrial progress J m fact, as
students will discover when they read economic history,
the tendency of progress is to increase the amount of
Capital required relatively to the number of workers
J then does a manjvho wishes to prod uce wealth obtain
Capital that he neeus ? He can either save it, or get

CAPITAL

91

it from some one else tv ho possesses it These two processes
require some consideration

The meaning of the term Saying is that a man does not
spend all the wealth that comes^uno'lns possession “Hut
"juts some of it aside for future 'use,' just as the grass-
gatherer of our illustration saved up pice till he could buy
a reap-hook. It is this process w Inch leads to an increase
in the -wealth of the country, and m ordinary life there is
no other way by which the stock of wealth can be increased,
since if all tlie inhabitants consumed wealth as quickly
as they received it, it is obvious that no stock can be
accumulated All the wealth then that is used as Capital
must be the result of saving, effected at some tune in the
past;' the amount of it is not increased by the other
processes we have mentioned, getting wealth from some
one eLc who possesses it This second process may be
effected in various ways A man may take Capital from
someone else by force or by fraud , this method has been
popular in India during many epochs, but has not been
permitted when a strong government was in existence,
and at the present time it is forbidden by the Indian Penal
Code, and prevented as far as possible by the police. Or
a man may inherit Capital from his father or some other
deceased relative This, of course, happens frequently,
but it is only by accident that Capital is left to a man at
the time he wants it; and a man who wants Capital cannot
rely on some nch relative dying at the most convenient
time Again, a man may voluntarily give Capital to another.
Tins method of getting Capital is by no means unknown
in India, but it accounts for only a very small portion of
the Capital that changes hands Almost the whole of this
passes either by inheritance or by the fourth method —
that is by borrowing, where the borrower promises to

92 AN INTRODUCTION TO ECONOMICS

return the Capital lent, and in most cases to give something
more (in the form of interest or otherwise) m consideration
of the loan

We cannot trace the history of India hack to the time
when the process of saving first began, that is to the time
when there was no accumulation of wealth That time
must he far beyond the period to' which the earliest Hindu
scriptures relate, because oven then there must have been
a considerable stock of wealth in existence. Judging by
what is known of the lives of the most backward races m
the world, it is probable that the practice of saving de-
veloped at first very slowly people got gradually into the
habit of putting away food when they found they had
more than they could eat at the moment, they devised the
very simple tools and weapons that many savage tribes
are known to have used, and they tamed some animals
It seems probable that the accumulation of wealth was
started along these three lines, hut wecanhbt "Bay — though
we may argue or guess — when they developed, or in what
order they came These three ideas, however, a store
for future consumption, tools or implements, and tame
animals, taken together make up the whole conception of
Capital, and when once they were established the conditions
existed under which wealth could be accumulated, and in
turn could he used for producing more wealth The pro-
gress of this accumulation may be read in economic
history , for the present purpose it is enough to say that
the general tendency is for wealth to accumulate with
increasing rapidity The process of accumulation may he
checked, and the stock of wealth may even be dimin ished
for the tune by wars or by calamities such as famine , but
the greatest hmderance to accumulation has usually been
found m the absence of a government sufficiently strong

CAPITAL 93

to ensure that people shall be able to keep the wealth to
which they are entitled

It is well to emphasise tins need for a strong and stable
government, becauso when it exists people are very apt to
accept its existence os natural, and to overlook its advan-
tages while they complain of its drawbacks. Men will
only employ their wealth to produce more wealth if they
have a reasonable prospect of enjoying the wealth when
it is produced. If they have not that prospect, they will
not risk the wealth they possess, and wall not struggle to
accumulate additions to thoir stock When, therefore,
complaints are heard of the harshness of government,
and of the rapacity of the police, it ib well to remember
that in India at the present time, though theft and fraud
are not unknown nnd though bribes may be paid, the
great majority of tbo people have confidence that they
will be able to keep whatever wealth they acquire . and it
is just this confidence which is necessary before people will
dovote their energies to the production of wealth

We have been speaking of the accumulation of a stock of
wealth , This is not just the same thing as accumulation
of Capitalr because people may accumulate wealth without
intending to employ it in production, and wealth becomes
Capital only when this intention comes into existence.
Tn India, as in other countries, there is a strong inclination
on the part of the people to accumulate a stock of wealth,
but there is not yet the same inclination as elsewhere to
employ the stock of wealth as Capital, and a very large
proportion of the wealth of the country is not at present
Capital, though it can become Capital if the owners so
decide. The mam reason for this fact will be found in the
want of security which existed for centuries before the
present gover nm ent was established People then wanted

M AN INTRODUCTION TO ECONOMICS

wealth, as they always want it, but they had the greatest
diffi culty in keeping it when they had got it They thus
developed the habit of keeping their wealth in forms w hero
it could be easily hidden and easily earned away, and gold
or silver or precious stones were the forms usually chosen
because they most nearly fulfilled these requirements And
this habit of hoarding, as it is called, still survives when
the need for it has passed away, so that there is a very
great aggregate of wealth lying useless in the hands of the
people, while there is a very great need for more Capital
to increase the productive powers of the land and the people
of the country The consequence is that the country is
poorer than it should he, because its productive resources
are not fully utilised , and students of Economics should
realise that, at the present time, one of the greatest practical
needs of the country is to secure the employment as
Capital of the wealth that is now lying unused, m order
both to increase the wealth obtained from the soil and to
develop those industries winch can profitablv be carried on.

CHAPTER Xm.

THE ORGANISATION OF PRODUCTION— -THE
SELF-SUPPORTING STAGE

We have now to enquire how the factors of production,
which have been described, are organised , that is, how
they come together, or are brought together, m the pro-
portions in v Inch we find them at work The description
of the way in which the organisation of production has
gradually developed forms one of the most important
divisions of economic history A great deal is known on
this subject regarding certain countries, but many of the
facts regarding India are still obscure, and there is a wide
field for research in this direction. The development has
certainly been gradual, and changes have for the most
part taken place slowly, so that a full description of it
would be very long, and cannot be attempted m this book
For the present all wo can do is to examine a few stages m
the development, and indicate some of the causes that have
led to gradual change. For this purpose we will consider
three stages, which may be called

a) The stage of self-supporting groups

b ) The artisan-stage market-production on a small

scale

c) The factory-stage market production on a large

scale

96 AN INTRODUCTION TO ECONOMICS

It must not be supposed that those stages follow each
other throughout the country in regular order, as April
follows March and May follows April So far as we can see,
the development has been vory gradual, and its speed has
varied very greatly from place to place, so that at any
given moment various stages can be seen side by side, and
the process of change can even be watched And tins is
true of the present day . we can see the most primitive
methods of production side by side with tho latest inven-
tions, and there is hardly a country m tho world that now
offers the same opportunity for a study of the whole subject
And the speed of change has varied not only from place
to place but from one industry to another Agriculture
m particular has progressed very slowly , the country is
still largely m the first stage in regard to this occupation,
and it is by no means improbable that it may remam so
for an indefinite period

What is meant by self-supporting — the term by which
we have characterised the first stage ? We mean that a
group of people themselves produce all the things which
they require to satisfy their wants, and that they obtain
nothing from people outside the group ' Probably tins
condition may be found to exist among sbme of the forest-
tnbes even at the present day, but in its pure state it is
no longer of practical importance, because nearly all the
people in India now satisfy some of their needs by buying
some things that have been produced outside the group
to which they belong But it is most important to recognise
that the whole agricultural system of the country seems to
have grown up under these conditions, and that many
villages are still very nearly self-supporting as regards the
satisfaction of the wants of their inhabitants , and since
agriculture is much the largest productive industry in the

ORGANISATION OF PRODUCTION 9?

country it is worth while to cousidor this stago in some
detail

If we examine the conditions that exist in the most back-
ward parts of the country, and exclude such features as are
clearly due to the modern development of trade, we find
the people living m villages which are very nearly self-
supporting The people are of threo .classes — cultivators
who hold the land, labourers who work for the cultivators,
and servants or artisans x Thc cultivators till the land
and the produce is used in satisfying their wants and those
of the labourers, servants, and artisans, all of whom are
remunerated for their service by portions of the gram
obtained at harvest Let us see how this w orbs out m dotail
A man wants for himself food, clothes, shelter, fire, light,
cooking vessels, water *, and the cultivator needs also seed,
implements, and cattlo For food, there is the gram
and pul^o grown in tho ullage, as well as sugar mado from
the sugar-cane and oil from some of the various seed
crops For clothes, there is the cotton grown on the land,
and spun and w oven into cloth m the village For shelter,
houses aro built of earth dug in tho village, and roofed w r ith
wood from the waste land, and eithor thatch made of
straw or tiles mado of earth. Fuel comas from the trees '
growing on tho waste land and from the dung of cattlo
light is obtained by burning tho oil pressed from seeds ,
and the potter makes cooking vessels from the earth of
the village Water comes from streams or wells, and there
is no doubt that when tho site of a village was first fixed;
the presence of water, cither on tho surface or below it,\
was one of the points taken into consideration. Then as
to tho cultivator’s needs , his produce supplies seed for
tho next crop- the village carpenter makes tho implements \
he needs, and the cattle are bred and reared on the waste \

a

98 AN INTRODUCTION TO ECONOMICS

land of the village If rent or revenue has to be paid,
it is paid from the gram at harvest-time
A village then could live m tbs way m isolation if, as
is the case, its inhabitants help each other m difficulties,
and look for help m return One man, for instance, may have
cotton to spare, and may exchange it for sugar, just as is
done even now ; but there is so far no need to offer any
of the produce to people outride the village in exchange
for things wbch they will bring from a distance There
is thus no need for money, and no need for trade, and it is
difficult for us to thmk of a country without money or trade
yet it is highly probable that the agriculture of the country
was originally established without their aid

There are, however, two wants which we have not yet
mentioned, and which may indicate the need for a slight
modification in this statement One of them is salt As
is well known salt can be washed out of the ground in many
parts of the country , probably some villages met the need
m tbs way , but it seems likely that salt is one of the first
articles m wbch trade grew up, and that merchants earned
it round the villages and exchanged it for gram or other
produce, as is still done over a large part of the country
The other want is iron for tools Even now agriculture is
earned on with the aid of a quantity of iron that seems
ndxculously small to European cultivators, but a certain
quantity is used everywhere in ploughs, reap-hooks, and
other implements, and the use has lasted for a very long
time It is quite possible that onginally no iron was used
in agnculture, but here too it seems likely that iron was one
of the first tbngs in wbch trade developed
Now let us consider what were the conditions of produc-

*? n ,f +1? cu bvators had Land to cultivate,

whether they found it vacant and settled on'it, or whether

ORGANISATION OF PRODUCTION 99

they obtained it from a Raja in return for the share in its
produce vhich was known as revenue And having once
got land, they ordinarily kept it, probably because when the
population of the country was small there was enough land
for everyone For Labo ur, there were the cultivators and
the members of their families, and there were the labourers
living in the village ; probably these last never thought of
going anywhere else and simply obeyed the cultivator’s
orders, and took the share of produce which he gave them
for their support For C apit al, there was the stock of
q attle , gradually increasing m ordinary times, with enough
waste land near the village to support a large number
there were the implements-made in the village of materials
found there, and paid for by a share m the produce , and
the produce yielded the se ed-g rain.that was needed

Now in these conditions, with no trade to take away
surplus produce or to bnng desirable things from outside,
it is probable that the wealth of the community would
increase very slowly if it increased at all, and that the
existing agents of production would not be fully employed
There would be produce to spare in good seasons, and it would
be stored for the time and consumed when seasons were
unfavourable and the crops poor but there would be no
motive for producing much more than was hkely to be
required, and it is probable that only enough land would be
cultivated to support the population dependent on it , and
that, taking good and bad seasons together, all or nearly
all the produce would be consumed If the population i
should decrease, less land would be cultivated, while if it
should mcrease new fields would be ploughed out of the
waste land, and possibly more trouble would be taken with
the land already cultivated Thus such a community
could not be expected to mcrease largely m wealth.

100 AN INTRODUCTION TO ECONOMICS

Suppose now that a town comes mto existence m the neigh-
bourhood of self-supportmg villages of the type that has
been described The townspeople will want to buy from
the villagers things like gram and pulse, vegetables, milk
and ght, oil-seeds, cotton and sugar , and they will be able
to supply the villagers with things brought from a distance
— new spices and condiments for their food, brass and copper
vessels, better clothes than the villagers can produce,
jewellery and ornaments, and so on. This makes a great
change in the position of the villager ho finds within his reach
desirable things of which he has never heard, and he begins
to want a share of them for himself (or, if he himself does
not, his wife does) , and m order to get them, he increases
the amount of his production, that is to say he works harder
himself and makes his cattle and labourers do more work,
and so either cultivates a larger area or gives more labour
to the land already m his possession The village then will
produce more than in the old days, and the villagers will
sell their surplus to the town, and spend the money which ^
they so obtain in buying the things which the town \
supplies

s The village has then ceased to be a self-supportmg group,
because it can no longer satisfy all its wants by its own
produce, and it is on the way to the second stage of pro-
duction, which we have described as * market-production
on a small scale,’ because the cultivators are now pro-
ducing partly with a view to selling their produce, 1 Let us
see how this change will affect the accumulation of wealth
In the first place there is no doubt that the produco of the
village will be increased , and, as a rule, a large proportion
of the money obtained for the extra produce will be spent
on esirable things that will last for a long time, such as
brass vessels or silver ornaments This means of course

ORGANISATION 0}? PRODUCTION 101

that the stock of wealth is increased In the second place
when money is received, the idea of hoarding it, which is
part of human nature, is sure to make its appearance, and
cultivators will work harder and produce more wealth
merely in order to increase their hoards, and m this way
too the stock of wealth will accumulate The villagers then
will tend to grow richer.

At first sight it may seem that this conclusion apphes
only to the cultivators, and most probably they would be
the first to benefit But if the town wants labourers, as is
likely to be the case, it will look for them in the villages,
and the wages offered may tempt some of the village-
labourers into the town. There would then be fewer men
to do the increased work on the land, and the cultivators
would have to induce them to work harder by offering them
something more than the share of the produce that was
sufficient m the old days, and so the labourers would m tune
get their remuneration increased. In the same way the
workmen and servants would'be' attracted to the town by
the higher wages offered there, and it would be necessary
to pay them more in order to induce them to stay in the
village, so that the increased wealth would be shared by all
classes, though by no means in the same proportions

Now a change of this sort has been going on slowly m
India during the last few centuries For the sake of clear-
ness we have supposed that the conditions changed sud-
denly ; this probably happened m a few localities where a
new capital city was established, but over most of the
country the change has been gradual Trade has extended
slowly, traders haye_come_ Jo_the_yifiages to buy first
one kind . of produce- and— then -another-, and_ mj-the
same way. first _one -desirabl e.. thi ng a nd t hen another
has been brought within the reach of the villagers The

102 AN INTRODUCTION TO ECONOMICS

ch ang e is still in progress some parts of the country have
advanced much further than others but the general effect
has been to mcrease very greatly the produce of the land,
and the wealth of the people w ho share it 1 The change
is not complete there are very few localities in India v here
agriculture has reached the second stage, and (as has been
said above) it is possible that it will never be reached com-
pletely 2 For illustrations of this stage « o must turn to the
towns

1 This doo3 not mean that oil classes of the people oro bettor off
than they were some have gained much moro than others, and
some may have lost , but this question concerns primarily the
Distribution, and not the Production of Wealth

1 If a village had completely reached the second stage, cultivators
would sell all their produce, and would go to shops to buy oven
their food , this actually happens in some countries, but no ono
who knows how Indian cultivators live will expect to see it m India
until the whole hfe of the country changes

CHAPTER XIV.

ORGANISATION OF PRODUCTION * THE ARTISAN

STAGE

We have now to examine the second of those stages of
production which we have selected for consideration It
is distinguished from the first stage by the fact that^ the
producer does not attempt to satisfy his wants directly by
those desirable things .which he produces h e intends mos t
or all of these things to satisfy the wants of other people, and
he supplies them to other people in exchange for payment
The payment may be made in the form of things which he
wants to consume, such as gram, but more usually it is made
in money, with which he can buy the things he wants
This stage is familiar in every town m India, for it is the
position of the great majority of the artisans The weaver,
the dyer,_the brass-worker, the shoemaker, — these men
cannot satisfy more than a very few of their wants with
the actual things which they produce they must sell
their produce, and feed and clothe themselves with things
bought with the money which their produce brings Let
us examine their economic position in regard to the three
factors of production *- "

First, as regards Land The amount of land which they
require is usually very small, much less than even a small
cultivator needs , but, as we have seen in Chapter VI , its

104 AN INTRODUCTION TO ECONOMICS

situation is a matter of great importance '.The artisan
must he in a place where customers will know where to find
him , not only, that is to say, must he bo in a town, but
often he must be in a particular street or lane where the
business in which he is engaged is known to be earned on
A shoemaker, for instance, wall pay what for lnm is a large
sum as rent to secure a shop in the street w hero people are
accustomed to go to buy shoes, and he would not pay so
much for a shop of the same size m a gram-dealer’s street
Thus, though an artisan needs very little land, it is often not
easy for him to get it exactly m the place where he wants
it, and his rent may take a considerable portion of his
mcome

Secondly, as regards Labour The artisan and his
family as a rule do most of the manual work, though he
may have to hire one or two labourers to help j Ordinarily
he uses only a few kinds of material and makes t hin gs of
only a few patterns , he thus goes through the same actions
over and over agam, and acquires a very high degree of
skill m performing them But besides doing the manual
labour of production, the artisan has to carry on the
business also This means that he has to choose the material
to be used, agree on its price, decide what particular t hin gs
to make and how many of them, fix their price, and find
people who will buy them A man in the self-supporting
stage has also to do the busmess, as well as the labour, of
his occupation, but the busmess is easier for him than for
the artisan produemg for sale, because he has to think almost
entire ly o f satisfying his own wants, while the artisan has
to satisfy the wants of other people The artisan then must
know what other people are likely to want, and this is much
more difficult than knowing what he wants himself If he
makes a mistake, he finds that he has wasted his labour

ORGANISATION 03? PRODUCTION 105

and Ins material in making things which nobody will buy ,
and if he cannot sell them, he has no money to buy more
materials, or to feed himself while he is making other
things

In the early stages of the progress of a community, this
necessary knowledge of business is not beyond the reach of
the artisan People then have comparatively few wants,
and they do not change rapidly, while on the other hand,
with little trade, there is usually not much choice of materials
But os we shall see when discussing Consumption, the eco-
nomic progress of a nation means an increase in the number
and variety of wants, and a larger choice of the means of
satisfying them ; it thus becomes more and more difficult
for the ordinary artisan to keep pace with these changes, and
where he fails to do so, his labour and material is wasted
The weaving industry furnishes a good illustration Not
very long ago, practically everyone in India, except a few of
the richest men, wore cotton clothes made on hand-looms
by the artisan-weavers of the locality. Only a few lands of
cloth could as a rule be got locally they were well-woven
and durable, but coarse, and people dressed very much
alike But now, even in the country, people have a much
wider choice of clothes They can buy the old type of
country-made cloth , or finer cloth woven in the mills of
Bombay or Cawnpore : or still finer cloth woven in Europe,
from cotton grown m America or Africa . or they can get
cloth made of wool or of silk if they are prepared to pay
for it People then can satisfy their want for clothing m
various ways, hut the country weaver has not the materials,
or the tools, or the knowledge, required to produce the lands
of cloth that are most wanted, and the demand for what
he can produce has consequently fallen off until he some-
times finds it hard to sell his cloth at ah

106 AN INTRODUCTION TO ECONOMICS

While then the artisan working for himself has the
incentive to hard work arising from the fact that his income
depends entirely on his skill and industry, his weak point
is his inability to keep pace with changes m wants and with
the development of new markets , and thus the economic
progress of a country may often result in injury to the
artisan’s position

Then as regards Capital The needs of artisans vary
greatly: some need expensive tools others require few
tools hut have to spend a great deal on materials while
others, whose work takes a long time to complete, need a
relatively large sum to live on until their w ork is ready for
sale But all are alike in needing Capital for some or all of
these purposes They are fortunate when they possess this
as the result of their own savings or the savings of earlier
generations of their family they are then free to work for
their own advantage, and — so long as their business-ability
is sufficient for the conditions in which they live — can hope
to produce more wealth than they need consume, and thus
can save and increase their stock of wealth ' But very often
they have not all the Capital that they require, and have to
borrow some of it and then the interest which they pay
may be so high that what is left of their income after paying
it is only enough to keep them alive, and leaves nothing
over which they can save Their position thus depends very
largely on the rate at which they have to pay interest, a
point that will be discussed under Distribution , but m
India at present the rate of interest is so high that a large
proportion of the wealth produced by artisans is paid to
the people who lend them Capital, and consequently the
artisans as a class have not much margin for saving They
produce wealth, but most of what is left over after pro-
viding for their subsistence is taken by the owners of

ORGANISATION OF PRODUCTION 107

Capital ; and the high charge for Capital is almost as great
a drawback ns is the difficulty of keeping pace with the
increasing diversity of wants

As w e indicated in the last chapter, the Indian cultivator
has to some extent passed bc3*ond the stage of self-support-
ing production, because some portion of his produce is
grown for sale, but he has not yet reached the second stage
in which wo find the artisan, and it is doubtful if he will
ever reach it completely But in so far as he produces
for the market and not for his own consumption, he has
difficulty, just like the artisan, m managing his busmess —
that is, in knowing what to produce and how to sell it.
The difficulty was not great in the simple case which we
first supposed, of the cultivator selling to the inhabitants
of a neighbouring towm , but it becomes very serious
when trade has so far developed that the produce is taken
for sale to distant places, and has to compcto with produce
from other parts of the world It is at present impossible
for the cultivator to know what lands of wheat or oilseeds,
for example, are most w’anted m England or Germany,
and though produco of this land is hardly ever likely to
be entirely wasted for want of a market, he may lose a
great deal of money by produemg kinds which are little
wanted instead of lands which are much wanted and wiuch
will fetch a lughcr price Again, cultivators may have
devoted themselves to producing some particular thmg
that has been wanted elsewhere, and then find that the
want has ceased to exist or is being satisfied in other ways ,
they have then to change their methods in a hurry and
plan out other W'ays of usmg their land, while they lose
tho advantage of the skill which they have acquired in
growing that particular crop. This has happened quite
recently in two instances in northern India indigo has

108 AN INTRODUCTION TO ECONOMICS

almost disappeared from large areas where it was exten-
sively grown, because the want which it met is now satisfied
by a dye prepared by chemical processes , and many
cultivators have had to give up sowing poppy because
the Chinese will no longer buy as much ot the opium pro-
duced from this plant as they formerly took

An d while the cultivator is at a disadvantage m not
knowing accurately the wants of people at a distance,
he may suffer also because people at a distance have been
able to discover the wants of India and are able to meet
thorn better than he can This, too, has recently happened
in the case of sugar large classes of people in Indian
towns and cities find that they can satisfy their wants
better with sugar brought from foreign countries than
with the land of sugar which the cultivator makes, and
so cultivators in some paxts of the country have difficulty
in selling their sugar and are produemg less than they
did

The cultivator also suffers, like the artisan, from the
high cost of borrowing Capital when he needs more than
he possesses, and his need for Capital has increased since
he began to produce for distant markets , more Capital
is needed to grow wheat than to grow barley, and much
more is needed to grow sugarcane , the produce of the
new crops represents more wealth than the old, but when
the cost of Capital is high it may take the whole of the extra
vealth and leave the cultivator no better off than before
W hilc, therefore, the increase m trade has greatly increased
the zenith of tho country, a large share of this increased
■wealth has been taken by the people who have Capital
to lend

Thus tho cultivator, so far as he produces for the market,
suffers from tho same drawbacks as are felt by the aitisan

ORGANISATION OF PRODUCTION 109

business is increasingly difficult to manage, and Capital
is dear , mid the more nearly the cultivator approaches
to the second stage of production, the more apparent do
the drawbacks become )

CHAPTER XV.

ORGANISATION OF PRODUCTION: THE
FACTORY STAGE.

We now turn to the third of the stages of production which
we have chosen for examination , In this stage we find
large numbers of _ men working together under the direction
of an employer J This, as we have said, is the condition
which industrial production has now reached in most of
western Europe, where the independent artisan is of com-
paratively little importance, and the same condition has
in recent years been established m the case of some in-
dustries m India, particularly mining and spinning It
is rare m the case of agriculture, and at a later stage
students will have to study the reasons for this fact , but
the production of tea is to a great extent effected on this
system

A simple case may be taken as a first illustration Sup-
pose that a man persuades 100 hand-weavers to set up
their looms in a building belonging to him, and to work
. for him in return for wages (which may be fixed either by
the duration of work or by the quantity of cloth woven
on each loom) - The employer buys the yarn and other
materials, decides what kind of cloth is to be made, and
arranges for its sale , and he keeps for himself the money
realised by sale The first effect of this arrangement is

ORGANISATION OR PRODUCTION 111

obvious • the business is separated from the manual labour.
The weavers have no longer to think and plan, but merely
to make the kind of cloth which the employer orders ,
all the thinking and the planning are done by the employer
The next effect also is obvious the weavers have no
longer to provide Capital, for the materials they need
ate supplied to them, and they live on their wages , the
employer has to find the Capital for buying material as
well as for paying wages.

This arrangement, then, would remove both the mam
drawbacks of the life of the artisan, as described in the
last chapter; as was there pointed out, the weaver can
weave, but he has difficulties both m business and m
getting Capital. If there were no other changes in the
methods of production, it might pay a business-man to
make this change, because his greater knowledge and
skill in business would enable him to get material cheaper
and to sell cloth dearer, while he would be very unlikely
to make anything that could not be sold. On the other
hand, it is probable that the amount of cloth produced
under this arrangement would be less than when the
weavers were working independently, because they would
have less incentive to hard work. They need only work
hard enough to avoid being fined or dismissed, whereas
before they worked their hardest in fear of starvation
But this question does not, in fact, arise, because changes
in the methods of production would be bound to follow.

The first change to be considered is known to economists
by the name of Division of Labour. Everyone knows that
an artisan-weaver does not spend his whole time sitting
at his loom every now and then he has to leave it to
prepare a new 1 warp,’ the name given to the threads of
yam that are stretched on the loom. Weavers can be

112 AN INTRODUCTION TO ECONOMICS

seen at this work in every town the warp is stretched
on sticks, usually by tho roadside, and certain substances
(known as ‘ sizing ’), are spread on it and brushed in until
they have been absorbed in the yam. Much o£ a weaver’s
time is spent on this work , but where many men are
employed, it is much better for Bomo of them to spend
all their time on preparing warps while the rest do not
leave their looms Thus the labour of weaving is divided
into two parts, the preparation of tho w arps and tho working
of tho loom hence tho expression Division of Labour.
Similarly the labour of preparing the warp would again be
divided, 6ome men being employed only m making tho
sizing, and others in putting it on tho yam the work
would be so distributed among the weavers that each
would make only one kind of cloth, and the most skilful
men would make the finest kinds , one or more men would
be told off to keep tho stock of yam, to measure the cloth
made, to send it to purchasers and so on , and a carpenter
would probably be kept to repair tho looms, and make
new pieces to replace those that wear out Thus there
would no longer be 100 weavers, each domg all the work
of an artisan, but there would be several grades of work
m the factory, and the workers of all grades would be
organised by the employer so os to make as much cloth
as possible, and at tho lowest possible cost
The numerous advantages m production which are
secured by Division of Labour are set out in detail in most
of the larger treatises on Economics The most important
of them probably are (1) the development of. skill when
a man spends his whole time at one land of work , and
(2) the possibility of getting from each workman the best
work of which he is capable The first of these needs
little explanation beyond what has been said in Chapter X.

ORGANISATION OR PRODUCTION 113

regarding the acquisition of skill . the fewer motions a
man has to execute, the more nearly perfect will he become
m their performance As regards the second, some kinds
of work are more productive and at the same time more
difficult than others A weaver who can produce a pattern
in fine cloth can earn more than one who can only weave
plain, coarse cloth • when working for himself, he may
sometimes have to make coarse cloth because he cannot
sell the better quality , but when working in a factory
he will spend all bis time doing the best work of which
he is capable, and the sale of the produce is the business
of the employer

One great advantage then of the factory-system is the
possibility of introducing, diyrsion-of-labour, which results
in increased produce from the same number of workers,
and also probably in a better quahty of produce due to the
greater skill that the workmen acquire _ The second great
advantage is the possibility of using machinery A first
glance into a large factory is very confusing . there is steam,
and noise, and there are many pieces of metal moving very
quickly in complicated ways , but if a student can look
closely at any one of the machines, he will find that it is
doing exactly the same kind of work as a labourer or artisan
though it is probably doing it more quickly and on a larger
scale If, for instance, he can examine a faetory-loom, he
will see that the shuttle flies backwards and forwards just
as it does in a hand-loom, only that it goes more quickly,
and that each thread left by the shuttle is pressed into its
place before the shuttle returns just as with the hand-loom ,
the processes are exactly the same, but the parts of the
factory-loom are moved not by the muscles of workmen
hut by the engine, which is caused to move by steam pro-
duced in the boiler The new thing is in fact not the

H

114 AN INTRODUCTION TO ECONOMICS

loom itself but the way in which its parts are caused to
move , and this is true of practically all the machines that
can be seen m factories It is possible to make a machine
which will perform any regular motion that a man can
perform, 1 either moving things back and forward, or moving
them up and down, or moving them in a circle , and m
all factories the question whether any particular grade of
work shall be done by men’s muscles or by machines is
simply a question of cost, and mac hin es will be used if they
can do the w ork more cheaply than men
In the weaving factory which we have taken as an
illustration, it is probable that the employer would find that
he could do better business if he put up an engine and
power-looms m place of the hand-looms with which he
started He would then be able to produce a very much
greater quantity of cloth with the same number of workmen,
because the men would no longer have to spend their mus-
cular energy in working the looms, they would be employed
in starting and stoppmg them as required, and m seemg
that everything was going right This change would mean
that the skill which the weavers had acquired is no longer
of much use a well-made machine is more skilful m this
sense than any man, and it can be trusted to go on making
the required motions as long as it is kept m proper order.
In place then of the weaver’s skill, the employer wall now
want a different kind of skiU, that of the mechanic who
knows how to keep machines m order , and he might decide
that it is useless to keep skilled weavers, and might employ

xnontal C nropLqM Q 6 f T 6n 136 ™ ac * a to perform some of the simpler
^ ’ l 1US machlnos add up figures are now vexy

=^T Pl °7 ed m P arts Europe They are as yet httte
™ '“T ClerkS able 40 do “"thmotio can be got for
”" P ™ i *° th0 “ *>“» »« p.,d m

ORGANISATION OR PRODUCTION 115

women and children to look after the looms at lower wages,
under the supervision of some trained mechanics

The introduction of machine-looms would not be the only
change Machines would also bo introduced for preparing
the warps instead of having this done by hand, and also
for various incidental processes ; and the employer might
decide to add a spmnmg-mill so as to prepare the yam which
he requires There would then be a large factory, producing
probably far more cloth than was formerly produced by the
weaver-artisans in the neighbourhood, and producing it at
less cost, so that people who want cloth could satisfy their
wants more cheaply than before. The factory would
provide employment for a large number of people , but on
the other hand it might deprive most of the artiBan-weavers
of the locahty of their means of hvehhood, because there
would be no purchasers for what they could produce

It must not be supposed that most faotones grow up m
the way that has been described for the sake of illustration ,
the first factories did probably grow up gradually, but now
that the nature and methods of a factory are well understood
new lactones are planned with complete equipment arid
organisation, and in some industries at least this designing
of factones forms a separate profession But whether
factones are set up complete, or whether they develop
gradually from small beginnings, the general features of
the factory-system are the same These features may be
recapitulated as follows :

(1) The business of buying, selling and managing is
separated from the actual work of production the business
is managed by the employer, and the work is done by the
workmen whom he pays.

(2) The workmen have nothing to do with the supply
of capital, which is part of the employer’s business, and of

116 AN INTRODUCTION TO ECONOMICS

course they have nothing to do with tho provision of land ,
they have to supply labour only

(3) The factory is so organised by introducing tho division
of labour and the use of machinery as to reduce tho cost of
producmg to the lowest possible point ; and this organisa-
tion makes the production much greater than would result
from the same number of men workmg independently

(4) The introduction of tho system, while it increases
the amount of tho wealth produced m proportion to the
number of persons employed in production, may deprive
some classes of the people of tho only skilled work Minch
they know how to do

Students will easily see that the factory-system requires
a much larger amount of capital than the system of small
production Buildings, steam-engines and machinery are
all very costly, and a large sum is also required for what ib
called working-capital, that is, for buying materials and for
paying wages and other expenses that must bo met before
the produce is sold In fact, the factory-system is not
generally possible until a country has made considerable
progress in organism g methods of bringing the savings of
individuals together in sufficient quantity to be used for
large enterprises The development of such methods is the
next subject that claims our attention.

CHAPTER XVI.

ORGANISATION OP CAPITAL.

The organisation of capital is a subject of interest tc
students of Economics m all countries, but m India at
the present time its importance is exceptionally great
We have just seen that the ind us trial progress .of the
country is dependent on this organisation, and the same
thing is" true of“its ’'agriculture , the Indian cultivator
needs, more than anything else, facilities for obtaining
capital on reasonable terms in order that he may get the
best results from the land which he occupies and the labour
which he furnishes It is no exaggeration, therefore, to
say that the organisation of capital is indispensable^ to
the developm enV of 3he V , ealth of the' whol^ country
"WeTiave seen that the accumufation-of a.stock of wealth
i s, natu ral, in the strict sense of that word , that is to say,
ordinary people are likely to save up a stock of wealth when
they have the opportunity of doing so, and the opportunity
comes when they can satisfy their immediate wants without
consuming all the wealth which they produce It is doubt-
ful, however, whether the use of accumulated wealth as
capital can be called ‘ natural ’ m the early stages of most
communities the intention of usmg the stock of wealth to
produce more wealth is not generally apparent, and a large
portion of the stock is more probably intended for

118 AN INTRODUCTION TO ECONOMICS

consumption w lien the need arises Certainly in India^only
a small part of the existing stock of w ealtli has been eared
in order to be used as capital probably most of it has been
saved pnmarly m order to enable the owners to live through
a time of fammo or some similar calamity And so long as
a man hves in fear of being robbed, it is not hkely that a
large part of Ins savings will bo used for production , ho
is more hkely, as we have said, to keep them in gold and
silver, which can be hidden or earned safely from place to
place When a strong government has been established,
the motive for such action ceases, but the habit remains ,
and even now the * natural ' course for a very largo number
of the inhabitants of India is to keep their stock of wealth
concealed, or as the phrase is to hoard it There is thus in
the country a vory large stock of wealth which is not capital,
because it is not intended to be used in produemg wealth
some of it is well known, as in the case of the hoarded
treasures of some Rajas and Nawabs , but tho bulk of it
probably consists m the small sums of money w hich ordinary
people keep hidden away until they find it necessary to
spend them

Conditions are different in some other countries, where
the practice of hoarding is rare, and where people save up
a stock of wealth with the distinct intention of employing it
m production and of gettmg an income from its use ^ and
since the employment of savings in production is a necessary
condition for a largely-mcreased production of wealth, it
is important to see how this employment is managed A
cultivator or an artisan needs, as we have seen, some capital
for his work but he may have a larger stock of wealth than
he needs to use as capital , and the same is more generally
true of landholders, officials and professional men, while
even labourers often have small savings available for employ

ORGANISATION OF CAPITAL 119

ment When the owner of capital cannot himself employ
it in production, he usually lends it to some one else who
promises to pay interest for its use , and this practice is of
course common in India in the case of those classes who
make a profession of money-lending as well as m other cases.
But it is sometimes difficult for a man who wants money to
know who will lend it, and it is very often difficult for a man
who has a httle money to know who wants to borrow it ,

1 the first great step in the organisation of capital is the pro-
vision of intermediaries who will take money from those
who have it to spare, and will lend it to those who need it
These intermediaries are known as Banks ' Banks perform
a large variety of functions, winch students will have to
study m detail at a later period of then course , but their
primary function is to collect capital from the people who
possess it, and lend it to the people who want it )(ln order
to collect it, a bank announces its willingness 'to receive
money on deposit, and promises to pay interest for its use,
and to return it at a fixed period after receiving notice that
the owner wants it back , and people who trust ths bank,
that is who beheve that it intends, and is m a position, to
carry out its promises, hand their money over to it) On
the other hand people who want to borrow money go to the
bank to get it, and the bank will lend it to them if it trusts
i them to pay the interest and to return the money when the
period of the loan has expired Naturally, people will not
do the work of a bank for nothing it aims^to_p_ay as low
( interest as possible.. on_deposits, and to charge .as high
' interest as possible on loans , and the difference between
‘,what it receives and what it pays constitutes its income,
'part of which is used in paying salaries and other expenses
of management, while the rest is kept by the owners of the
t bank.

120 AN INTRODUCTION TO ECONOMICS

Banks arc now familiar institutions m most Indian cities.
The early ones were started "by Europeans who were familiar
with the system m their own countries, but the system is
now being adopted by Indians who have seen its success
At present we are concerned only with the aid which banks
provide m production , this may bo very great, because
they can lend the capital required by employers in order
to buy materials and to pay wages and other expenses of
production, the loan being repaid when the goods made are
sold , j and m fact a large proportion of the rcsouices of
banks are employed in this w ay, and the system of factory-
production is thus very greatly facilitated.)

The ordinary banks cannot, however, provide all the
capital that producers require, nor can they collect all tho
money that is available for use as capital Their chief
limitations are two

(1) They cannot safely lend a large proportion of their
capital for such purposes as the purchase of buildings or the
purchase of machinery

(2) They cannot either lend or borrow in small sums

(1) We have said above that a bank must be ready to
repay money deposited with it when the depositor wants
it , if it is not ready to do this, people will not trust it with
their money Now suppose a bank has lent all the money
it possesses to men who have spent it m building factories
and setting up machinery, and then the depositors want
t eir money back The bank has no money to pay them ,
it as only the promises of the men who borrowed the
money, and if they cannot borrow it somewhere else, then
the bank must tell its depositors it cannot pay them In
other words it is bankrupt, and it is most unlikely that
onyone would ever trust it with a deposit again This is

ORGANISATION OF CAPITAL

121

nn extreme case, but it illustrates one of the fundamental
principles of banking, that the bank must always be m ai
position to pay what is duo from it, and that most of its ,
money can bo lent only for short periods and with a
reasonable certainty of getting it back at the end of the'
period While therefore a bank is ready to lend money
to an}’ employer whom it trusts, to be used m the expenses
of his business and paid back after a short penod, it will
very rarely lend money for purposes such as building a
factory or buying machinery.

(2) In practice banks find that the expense and risk of
dealing in very small sums is so great that no profits result.
Some banks, which are anxious to got capital together
quickly, may lake deposits of as little as ten rupees, but it
takes a long tune for a man with a small income to save as
much as this, and, in order to make the savings of the people
available as capital, institutions are wanted which will take
every rupee as it is saved 4 Similarly a bonk will not lend
to ordinary cultivators or to artisan-producers, because it
could only trust them with very small sums, and it is not
\\ orth its while to lend a rupee or two at a tune.

Banks then by no means complete the organisation of
capital that a country requires for production One great
need is for a system of supplying capital for purposes such
as starting and equipping factories the other is for dealing
with capital m sums too small for the ordinary bank to
handle The first of these needs is met by the establishment
of what are known as * joint-stock jpr * limited * companies. 1

1 * Joint-stock ’ means that people join their capital together ,
stock, it will bo remembered, is the old word for capital The word
4 limited * has o history Undor ordinary law when people join
their capital m an undertaking, each of them is liable for all the debts
of the undertaking, not merely up to the amount he has contributed
but ud to the whole of his possessions It is obvious that people

122 AN INTRODUCTION TO ECONOMICS

There are, of course, a few men rich enough to build
factories and set up expensive machinery with their own
capital, and many small factories (such as cotton-ginning
mills) have been started in this way in India But large
factories, such as spinning mills or ironworks, require each
many lakhs or even some crores of capital, and if they are
to be started m considerable numbers it must bo done by
the contributions of many people > When a few men decide
to start a factory, they usually form themselves into a
limited company, and ask other people to * take shares,’
that is, to subscribe fixed sums of ten or fifty or one hundred
rupees towards the capital which the company requires.
If enough shares are taken, the money received for them
is spent in setting up the factory, further capital for working

DeCeSSary tom a bank > ™d the profits
m i ll M 07 &re dlstnbuted to the shareholders
mT i ) amOUnt ° f their 8hares Thus a land-
avidST a P f r* ° r u amaglStrate > or anyone with capital

ormte miH an tabe . shares ’ m ^nworks, or cotton mills,
or jute mills, or coal names, or other productive industries,

de^r^ retUm aU mooIne > the amount of which

ol ’ t hewf' ! T C6SS ^ ^ 0h th0 nidustry is earned
If he wants his money back, he cannot as a rule claim

P«2* ^iatSLt 0 raanag°e?St 0 i theS ® t* 1 ™ 3 - w hon an incom-
fchem to poverty, and the svstonfnf d ®kta that would reduce
remove this drawback. A mm™ ‘rrutedh ability was devised to

formalities (one of which is the use n^iT** 1011 . J com P hes with certain
has the imvik™ tv™ ? se of .tho word ‘ limited ’ m its title),

F aank #.1 1 mm . . •’

has the privilege that ttie habih tv of 'en T? ' ^

the amount of his share if h? f eaoh s harelioIder is limited to
o ioo™p. K «?. . «h«e

nftv .. ^ , /» w in any

lt P >™ r ! an thl3 » he may lose it
A man who takes a share m° f P ro P erfc y is m no way
hnowB that his liability is limited & lmuted ’ company thus

OBGANISATION 03? CAPITAL 123

it from Iho company, but he can sell Ins share ; and on the
other hand a man who has money can buy shares m existing
companies instead of contnbutmg to new ones The
busmess of buying and selling shares is now so large even
in India that there are brokers in Calcutta and Bombay
and some other cities who make it their principal occupation,
and arrange for buying and selling shares m compames,
just as other brokers arrange for buying and Belling wheat,
or coal, or ]ute Thus a man who has capital to employ,
but does not want to engage in production for lnmself, has
, now two waj T s of disposing of it he can deposit it with a
bank and receive interest, or he can go to a sharebroker
and buy shares m some compames, in which case he receives
the profits due to those shares by way of income.

The variety of compames is very great, and there are
often different kinds of shares, while important questions
arise m practice as to their constitution and management
The whole subject will require much study at a later stage
our present purpose is merely to show the function that
these compames perform in production , they can collect
a large capital m relatively small sums, and thus make it
possible for men of enterprise to start a factory with much
more capital than they themselves possess

But though the shares in a company may represent
relatively small sums of money, they are not small enough
to attract the savings of the poorer classes. Special . *
institutions to, effect this object have been established in
many countries under such names as savmgs banks, people’s
banks, provident societies and the like, which are designed
to receive very small sums, in some cases as httle as an anna
at a time Various lands of banks too have been devised
to meet the needs of small producers for capital by giving
loans in very small sums. In India there is as yet no general

124 AN INTRODUCTION TO ECONOMICS

organisation 1 to servo these purposes, and small savings
are usually hoarded improductively, "while email producers
have to pay very high interest when they borrow from
moneylenders , but there is good reason to hope that the
need will be largely met by the co-operative societies which
in the last ten years have been organised in considerable
numbers This movement will engage the student’s
attention at a later stage , at present we are concerned
chiefly with the fact that the organisation for supplying
capital for use in production is m India still very incomplete
Considerable progress has been made towards enabling t
the well-to-do man to invest his savmg 3 m production,
but cultivators and workmen have neither convenient
means of mvestmg their savmgs, nor convenient means
of obtaining additional capital

1 The nearest approach to such an organisation jb the Post Office
Savings Bank , it receives very small sums on deposit, but it does
not lond money to the public

CHAPTER XVII.

SPECIALISATION OF THE FACTORS OF
PRODUCTION.

We have now described three typical stages in tho gradual
development of production that has taken place in tho
world ; before leaving this subject it is dcsirablo to direct
attention to one general principle which can be found among
the ch inges that lead gradually from one stage to the neat
Thi= principle can bo spoken of as Specialisation,, and it
may be stated as a law in the folio wing terms ~ The tendency
is for Land, Labour, and Capital to become more and more
demoted to satisfying some particular want, and at the
same tuno to become less avaiiablo for satisfying other
wants The meaning of this statement will bocomo plain
from the paragraphs that follow

In the first stago of production which we considered,
when a village or group of villages satisfies its own wants
by the things which it produces, tho land which is cultivated
cannot bo described as devoted to satisfying any particular
want , it is used to satisfy most of tho wants of the village,
for food, clothing, light and the rest. Progress towards the
next stago, in which cultivators produce for a market, is
marked by gradual specialisation experience shows the
people that tho sod and climate of different parts of the
country are more suited to one crop than another , then
each crop is grown more widely m the villages where it does

126 AN INTBODUCTION TO ECONOMICS

best, and each village tends to givo up those crops that are
most difficult to grow successfully For instance, there
is much evidence to show that formerly most localities in
northern India grew both sugarcane and cotton, the former
to supply the inhabitants "with sugar and the latter to
furnish material for their clothes But this condition no
longer prevails it is now comparatively rare to find a
locahty that produces both sugar and cotton in large
quantities The two crops do not require ]ust the same
climate, sugarcane wanting a moister atmosphere than
cotton , and sugarcane is now more largely grown in the
relatively damp country near the Himalayas, while cotton
is found mainly in the drier country to the south and
west Many villages, that is, no longer satisfy the wants
of their inhabitants for sugar, because it is cheaper and
more convenient for them to buy sugar than to grow
sugarcane , and many villages grow no cotton at all because
they can buy the clothes they want with the money they
get for their sugar or other produce This specialisation
of Land is undoubtedly an advantage from the point
of view of production, because the land is used for the
crop that grows best on it there is, however, the draw-
back already mentioned, that the cultivator has to know
what is wanted by people at a distance, and may find
his business seriously upset by a change in their wants
Specialisation of this kind is not confined to the case of
particular localities in one country, but apphes to the whole
world thus practically all the tea that is drunk m Europe,
Africa, America and Austraha comes from three parts of
Asia China, Ceylon, and a limited area in Bengal and
Assam , while the ]ute grown in a few Bengal districts
makes the sacks in which nearly the whole of the world’s
trade m gram and oilseeds is carried.

SPECIALISATION OP PRODUCTION 127

Another instance of the Specialisation of Land is found
m the localisation of particular industries Even m the
stage of market-production on a small scale this localisation
has begun * particular towns, and particular streets in the
same town, get a reputation for some particular product, —
leather-work, or brass-ware, or whatever it may be,
people go there to buy the things for which the place w
known, and artisans go there because they know that they
can sell their produce, and that the materials which they
need can easily be procured Thus, almost everyone m
northern India has heard of the brass-ware of Moradabad,
or the silver-work of Lucknow, and these cities supply
their wares not only to many parts of India but even to
foreign countries When the factory-system establishes
itself, the considerations that determine where an industiy
shall be earned on are somewhat different, but the result
is the same each industry tends to be established m one
or more localities, and cities or towns become specially
adapted to the needs of a few mdustnes Thus, almost all
the jute mills in India are close to Calcutta ; Bombay,
Ahmadabad and Cawnpore are> known as the chief centres
of cotton-spinning, and so on/ This localisation of mdus-
tnes conducted on the factory-system has important results
for production, which are discussed in the larger treatises
on 1 Economics , at present we are concerned only with the
fact of localisation, that is with the specialisation of par-
ticular localities for production of a particular kind

Next as regards specialisation of Labour This exists
to some extent even in villages, where we find artisans such
as carpenters or potters, and servants such as washermen
but most of the residents in a village are employed in the
large variety of operations that are included in the term
cultivation , and even the artisans and servants often spend

128 AN INTRODUCTION TO ECONOMICS

part of their tune in this less-speciahsed work, since the
carpenter and washerman and so on frequently cultivate
some land in addition to domg their specialised -work It is
not difficult for us to think of a village without these
specialised workers cultivators and their families could
make their own implements and do all their own work,
but we can see that even in the villages that have made
least progress this process of specialisation has begun
When we come to the second stage, the specialisation is
obvious the artisan satisfies very few of his own wants
directly, but depends for his livelihood on his success in
satisfying a few particular wants of other people \ Thus,
the brass-worker can satisfy no want of his own except a
want for vessels or other t hin gs made of brass , in order
to get food and clothes and satisfy all his other wants he
must find other people who will be satisfied with what he
has made And m the third, or factory, stage of production,
this process of specialisation is as we have seen carried much
further the whole business -part of production is done by
one set of persons, and the labour by another set , and only
a small proportion of the workmen could satisfy any single
want of their own The person who merely knows how to
manage a machine-loom could not make a piece of cloth
by hand any more than the driver of the engine could , he
can only carry out one step m the series of processes by
which yam is made mto cloth, and his work is useless
without that of the other grades of workmen who carry
out the remaining steps

And in the same way the tendency is for Capital to
~come more ^and more specialised Economists usually
divide capital into two kinds, which are described asj fixed’
and circulating ’ circulating capital is consumed in a
single use, or, in the words of Mill, “ fulfils the whole of its

SPECIALISATION OF PRODUCTION 129

office in the production in which it is engaged, by a single
use ” , fixed capital lasts longer and is frequently used, or,
to quote Mill again, “ exists in a durable shape, and the
return ” to it “ is spread over a period of corresponding
duration ” Thus materials, fuel, and money or gram for
paying wages are circulating capital, but buildings or
machinery are fixed. Now the whole tendency of the change
in methods of production is to increase the amount of fixed
capital, and to employ more of it in a highly specialised form
The cultivator has very httle fixed capital most of it —
his cattle — can be used to do almost any land of work, and
his fow implements help to produce the means of satisfying
almost all his wants. The artisan too uses httle fixed
capital, but it is more specialised the tools of the brass-
worker for instance are of httle use except for working brass
In factories the use of fixed capital is very greatly mcreased
parts of it, such as the buildings and the engines, are not
absolutely specialised because they could be used (to some
extent at least) for production of a different kind to that for
which the factory was designed , but most of the machines,
as distinguished from the engines, are very highly special-
ised indeed, and will serve no purpose except that for which
they were made. And the process goes even further, because
as the factory-system develops, factories are set up to make
machines for use m other factories <Thus in some parts
of the world there are factories which make nothing but
machine-looms others may make nothing but spinning-
machines . others make only machines for grinding gram
or pressing oilseeds , and the machines used in these machine
factories may be very speciahsed indeed^

Thus the tendency to specialisation exists m the case
of all three factors of production \ The same principle may
be looked at m another way , the size of the self-supporting

r

130 AN INTRODUCTION TO ECONOMICS

economic groups increases progressively At first wo were
concerned with the residents of only a single village, or
group of villages, satisfying practically all their wants
directly by their own produce Then the area widens as
the villages satisfy some of the wants of the town and the
town satisfies some of the wants of the villages. The
process of extension goes on until we must now regard
the population of the whole civilised world as forming a
smgle self-supporting group, since it can hardly be said of a
smgle country that its products satisfy all the wants of its
inhabitants Even m an Indian village one now expects
to find matches from Sweden or Norway or Japan, oil from
Russia, or Burma or America, cloth made m England out
of American cotton or Australian wool, articles of metal
obtamed from England, Spam, Malaysia and many other
countries, glass from Belgium or Austria, and so on , and
m an ordinary town one can find products of almost every
country in the world on sale to satisfy Indian wants. And
this is equally true of other countries , Eng lishm en satisfy
their wants with the products of every co un try to a much
larger extent than is the case in India, smee even their food
is very largely brought from abroad , and Indian products,
such as tea and jute, are to be found m every country
If the question is asked how this development has been
brought about in India, the answer must be that, while
many causes have contributed, the most important smgle
actor has been the mcrease in means of co mm unication
ot in India itself and between India and other countries
m a, first by roads and waterways, and then by railways ,
an outside India, first by the sailing ships of various
uropean countries and then by steamships The industry
of transport, or moving goods, is itself productive, as has
y een explained , and its development has rendered

SPECIALISATION OP PRODUCTION 131

/possible the great increase in production that has taken
place Thus the most important as wed as the most
/ interesting parts of Indian economic history -will be found
to deal with the development of communications

Note to Chapter XVII.

Indian students cannot fad to notice the close connection
that exists between the modern system of caste and the gradual
specialisation of labour which has been pointed out in tins
chapter The classical Hindu writings tell of three superior
castes, the Brahman priests and administrators, the .Rajput
prmces and warriors, and the Vnishya merchants and traders ;
• and they class the rest of the population as Sudras or as out-
casts of mixed descent But these lower classes are now found
organised on a caste-system as strict as that of the superior
classes of the people they submit willingly to the same kind
of restrictions regarding marriage, and each low caste has its
own appropriate occupation Further, a tendency is noticeable
for castes to subdivide os their occupations subdivide, and
instances of this subdivision can be found m various Census
Reports The history of the establishment of this system of
castes coinciding with the division of occupations is not per-
fectly known, and in the absence of written records many points
in it are likely to remain obscure , but it is reasonable to
conjecture that the idea of hereditary occupation, winch seems
to be inherent in Indian ways of thinking, has counted for a
good deal In most countries the process of specialising
occupations has gone on without producing a system of caste,
because there was no particular reason why a son should follow
his father’s occupation, but m India a son ‘ naturally ’ follows his
father’s occupation, so that when a new specialised occupation
comes into existence, it remains in the families of the men who
first adopt it, and those families model their social relations
on those of the already-existing castes with which they are
familiar So much at least is true that the ideas of caste and
of occupation are very closely associated in Indian thought

CHAPTER XVIII.

PRODUCTION CONCLUDING REMARKS

BeroRE leaving the subject of Production a fow words ol
caution are desirable The study of economic history has
led to the conclusion that the development of production
passes through the same course in all countries tvkere the
facts have been examined, and it is reasonable to infer that
India is no exception, and tbat the factory-system of
production on a large scale, U inch has already established
itself m some industries, must inevitably supersede the
small-scale production which, still prevails. But the in
ference, though it is reasonable, is not absolutely certain ,
the study of economic history is not complete, and it is not
safe to draw absolute conclusions from it until more is
known, in particular, of the development of economic
processes in other parts of Asia Nations are not alike m
all respects, and it is possible that the factory-system may
prove to be unBUited to Indian ways of living and of thinking,
and that some other system of production may establish
itself which suits the people better Students should not
therefore, at this early penod of their studies, get the idea
that production m India can develop m only one way, that
large factories must increase, and that independent artisans
must be superseded by large bodies of wor kme n receiving

wages from employers students may think that, on the

PRODUCTION CONCLUDING REMARKS 133

known facts, this change is likely to occur, but they should
not regard it as the only possible development in the
future

Further, students must be warned not to infer that the
general establishment of the factory-system is necessarily
a thing to be desired We have pointed out in the first
chapter that the science of Economics has nothing to do
with praise or blame it is concerned with what is happening
and what is likely to happen'^ But economists, and also
students, are human beings, and they can hardly help
wishing to know whether a change which they foresee is
good or bad, while they may, as administrators, or as
teachers, or as business-men, have to decide or advise at
some time on the action to be taken in economic matters
Students have a long course before them, and they need not
yet decide for themselves whether the general establishment
of the factory-system would be for the benefit of the people
of India as a whole it is their duty, while they are
students, to keep an open mind on this question, and it is
in order to help them to keep an open mind that the
following considerations are shortly stated here, though
a much wider study of the subject is needed for their full
appreciation

,'JIhe first consideration is that India is a very poor country
The people as a whole want a largo mcrease in w ealth to satisfy
their most urgent wants many of them need more nourish-
ing food, better clothes, better houses, better health, better
education, to name only a few of these wants and any
system of production that null give a large mcrease of wealth
is desirable because it will give a chance of satisfying some
of these most urgent wants This consideration then is
in favour of the factory-system, which certainly brings a
large and rapid mcrease m the production of wealth , it

134 AN INTRODUCTION TO ECONOMICS

would be equally in favour of any other system vihich should
produce the same result

The second consideration is that though more wealth
may be produced by a change in the system of production,
it does not follow that the new wealth will be available for
the people who want it most , it may possibly be available
chiefly for the richer classes, the landholders and merchants
and employers, while the poorer classes may be little better
off than they are now Students will understand this

consideration better when they have mastered the theory
of the Distribution of Wealth , but they can see that a change
m the system of Production may not be a great advantage
for the people as a whole, if the advantage is enjoyed by only
a small proportion of the people And the force of this
consideration is strengthened by the fact that in countries
where the factory-system has developed the result is not
entirely satisfactory Some people think that the system
of Distribution which has come into existence along with
factory-production is so unsatisfactory that it would be well
to change the system of production in order to secure a
better distribution of the product , and m any case it has to
be admitted that poverty has not been abolished by the
increase of wealth The study of the English writers on
Economics during the nineteenth century is most instructive
from tins point of view , some of the earlier writers saw few
or no drawbacks in the factory-system, which was then
quite new , they recognised the great increase m wealth,
and were confident that its distribution Mould be satis-
factory The same confidence is not found m the later
^riters , and the feeling of dissatisfaction often finds

m V dVOCaCy ° f hTge economic changes, -

Student* 11 w '°P erat,1 °n, Socialism, or Communism
Students will later on have to make themselves familiar

PRODUCTION CONCLUDING REMARKS 135

with the nature of these proposals, and with their advan-
tages and their drawbacks for the present what they have
to do is to remember that the factory-sys tem'of production,
and the distribution of wealth that has come into existence
along with it, are not absolutely inevitable mTIndia” and
that a great deal of study and thought will have to be gone
through before a useful opinion of their desirability can bo
found.

book III-

CONSUMPTION.

CHAPTER XIX.

WANTS.

We come now to consider the second 'mam division of
Economics, the Consumption of Wealth Students will
remember that (1) all wealth consists of desirable things,
or tlinigs that people want, and (2) that wealth is consumed
m satisfying wants , but (3) that there are some wants
which cannot be satisfied by wealth. The student of Eco-’
nomics is concerned directly with those wants only which
can be satisfied by consuming wealth Ho must leave out
of his calculations those wants of human nature which
wealth cannot satisfy, but it is most important for him to
realise that when a man has to apply the conclusions of
Economics to the practical affairs of life he must allow for
these wants which the economist has left out of account ,
the science does not deal with the whole of life, but only
with a part of it, while the man who is dealing with practical
affairs has to think of the whole The science then cannot
tefi him all he wants to know , it can tell him much about
one side of life, but there are other sides of which it can tell
him nothing

But the part of life with which the science deals is large
and important, as can bo seen from a consideration of the
wants that can be satisfied by wealth. Food, clothes,
shelter, warmth and light, these thmgs.satisfy a very large

140 AN INTRODUCTION TO ECONOMICS

proportion of the wants of an ordinary man, and much the
greatest share of his income is usually spent m obtaining
them Then there are the innumerable articles which meet
his wants as convemences , all the things which ho can buy
in shops , the means of conveyance, or of amusement, which
he can enjoy on payment , opportunities of education, or of
medical treatment, and so on And speaking generally,
Economics is concerned with all the wants to satisfy which
a man spends his mcome , or we may say that the economist
is concerned with all the wants which a man can satisfy

i

by spending money

We cannot define Wants, except to say that they are a
part of human nature , man as we know him feels certain
wants, and exerts himself to satisfy them And wants
seem to differ so much among themselves that at first sight
it looks as if no general statement could be made about
them As a matter of fact only a few general statements
can be made, and consequently this division of the science
oan be explained more shortly than is possible in the case of
Production, but the few general statements that can be
made are of great importance, and their meaning must be
clearly realised - -

The first point to be realised is that all wants are not felt
as equally urgent , we may say that wants vary m intensity
according to the individual, and according to his circum-
stances at the time the wants are felt Very few people
are in a position to satisfy all their wants, and the ordinary
man has constantly to decide what wants he will satisfy
and what wants he will endure, or in other words what
things he will buy and what things he will do without he
buys the things of which he feels the want most intensely,
and does without the others Other people may think ho
has chosen unwisely, and at a different time he might make

WANTS

141

a different choice ; but at the tune he decides, the wants
which he satisfies are felt by him more intensely than those
which he endures. And so when a man is planning how to
spend his income, he provides for the satisfaction of his
various wants in the order of their intensity, as it appears
to him at the moment Intensity is not a quality of tilings
that can be defined ; it is a state of feeling, that is, it is
part of man's nature, and the economist has to take it mto
account accordingly.

The second point to realise is that almost every separate
want can bo completely satisfied if a man has enough money
to pay for the satisfaction This too is a matter of common
knowledge, and students can verify it from their own
experience No want can be felt more intensely than the
want of food or drink ; a man who is famt from hunger or
thirst would give almost everythmg he possesses for a meal
or a drink of water , but when he has got these Ins want is
satisfied for the time, and he wants no more food or water
till he is hungry or thirsty again Or again if a student
wants a pair of shoes, or a particular book, or a tennis-bat,
he can satisfy the want completely if he has the money to
pay for the article in question

If then each separate want is capable of being completely
satisfied, it will be thought that a man can easily reach the
condition where all his wants are satisfied and he wants
nothing more This condition is, however, rare ; human
nature is such that wants constantly increase in number
and variety, and new wants make themselves felt as
existing wants are satisfied This is the third general
statement that can be made concerning wants , like the
others it is based on man’s nature, and the economist has
meiely to accept it as a fact A hungry man can be satisfied
for tbe time by a meal of the coarsest food, perhaps a little

142 AN INTRODUCTION TO ECONOMICS

millet and pulse , but when a man is sure of getting such
food he begins to want better food and a grcatei variety,—
he wants wheat-flour instead of millet, he wants , and
vegetables, and rice, and perhaps fish, and ho wants all
sorts of spices and flavours Then ho wants the food
better served, and ho wants metal dishes and vessels instead
of the earthen vessels which at first sufficed him A man
who wants clothes is satisfied at first by a coat and waist-
cloth of the coarsest cotton cloth , when he has got these
he wants finer cloth , then he wants a change of clothing,
he wants shoes and a cap or turban Then he begins to
want a greater variety, warm woollen clothes for the winter
and perhaps silk foT the hot weather, special lands of clothes
for games or for riding or other pursuits, and so on The
young pleader may be only too glad to be able to go to
court on an ekka or m a tramcar, but as he gets richer he
wants first a trap and horse of his own, then a carnage and
pair, and then perhaps a motor-car These aro only a few ’
obvious examples of what is almost an universal tendency
and students can supplement them readily by their own
observations They 11011 see that most of the people they
know are never completely satisfied, but become conscious
of new wants as the old ones are met, and that they have
no difficulty m disposing of the whole of their income,
however much it may be increased

But while the tendency for new wants to arise is almost
universal, the rate at which this tendency operates differs
greatly among people m different conditions of life , this
is one of the chief distinctions that can be observed in
examining the life of the inhabitants of India at the present
day In a village lying far from the railway we shall usually
find that new wants arise slowly, and that some at least of
the inhabitants may almost be described as * satisfied,’ that

WANTS

143

is, they are not conscious of any intense, unsatisfied wants
Probably tins condition was not uncommon when the
villages were more neaily in what we have spoken of as the
self-supporting stage , it is now certainly less uncommon
in the villages than m the towns, and among the villages
it becomes less common as knowledge increases. The chief
reason for this fact is that a want becomes much more
clearly felt when the means of satisfying it are known , as
people’s knowledge increases, they learn of new means of
satisfaction, of which they have hitherto been ignorant,
and they begm to want similar satisfaction for themselves
To take an illustration before motor-cars were invented,
even wealthy people were fairly satisfied with horses and
carriages , they might feel the want of better horses or more
comfortable carriages, but they were not conscious of a want
for an altogether different form of conveyance. But when
motor-cars were invented, and a few of them appeared in
India, people soon began to feel a want for them, a want
that could not be satisfied by horses and carnages , and
whenever a motor-car was brought into a new district, the
want made itself felt there, until now there are some motor-
cars in most districts, and there are many people who feel
the want of them but are unable to satisfy it
This example illustrates the way in which new wants
arise from increased knowledge^, knowledge is constantly
increasing, not merely through education but through the
extension of trade and of the practice of travelling that has
followed on the construction of railways ; and it may be
said that the rate at which wants multiply increases with
the spread of knowledge It is not likely, therefore, that.,
the progress of the country will lead to a condition in whicht'
a larger proportion of the people are completely satisfied
than is the case at present, on the contrary, we must

144 AN INTRODUCTION TO ECONOMICS

j expect that though peoplo may bo able to satisfy more and
}more wants, new wants will arise more and more quickly,
Iso that there will always be unsatisfied wants.

As regards wants then, students should realise that for
the ordinary man wants vary m intensity, and that each
separate want can be satisfied , but that as old wants are
satisfied new wants arise, so that it is very rare to find
people with no unsatisfied wants, and the number of such
people is more likely to decrease than to increase In the
next chapter we shall glance briefly at a few exceptions to
these general statements

CHAPTER XX.

WANTS ( Continued ): SOME EXCEPTIONS.

The exceptions to the general principles regarding men’s
wants which are considered in this chapter are not of great
direct importance for a preliminary account of Economics
It would be possible to leave them for consideration at a
later stage, but it seems better to say a little about them
now, partly because they will illustrate further the nature
of wants, and partly because some of them may occur to
students, and may appear to contradict what has been said
above

In the first place, there are cases where particular wants
- do not seem to be capable of satisfaction, so that the more
a man .has of a particular, thing the more of it he wants.
The love of ..display is one of these" Some people want
above all things to make a display and impress other people
by the magnificence of their houses, their clothes and jewels,
their horses and carriages, and generally of their way of
living ; they are always spending money on fresh objects
of display, and never seem to be satisfied This exception
is apparent only, because the love of display is not exactly
a simple want such as the want of food or clothing ; it is
made up of a very large number of simple wants, and as
each of these is satisfied new wants appear At one tame
such a man will want to buy a fine carnage ; having bought
it, he is satisfied for the moment, but perhaps a few days

K

146 AN INTRODUCTION TO ECONOMICS

later he wants a motor-car, and so on Or he bujB an
embroidered coat which satisfies him for the moment, but
he soon gets tired of it, and buys a more expensive one
The case is therefore an illustration of the principle that
new wants are constantly arising, rather than an exception
to the rale that wants can be satisfied completely.

Another exception to this rule is the want of power
Some men want power over other men more than anjibing
else , they will do anything to satisfy the want, but the
more power they get, the more they want This lust for
power has been a common feature in the past history of
India, at times when any successful officer of the Emperor
might aspire to set up a kingdom for himself , and it accounts
for many of the wars and rebellions that were then so

common , it can no longer show itself in tbig way, but its
working may still be observed m the social and political
life of the country. This exception seems to be real, that
is to say, the lust of Eome men for power cannot be satisfied
But such men are not ordinary men, and the economist is
concerned with the wants of ordinary men
Another exception o'f the same kind lsthemiaer, that is,
the man whose greatest pleasure is to accumulate material
wea t , usually m the form of gold, or silver, or precious
stones He does not want wealth m order to spend it, or
to secure power or position, or to make a display he only
wante the knowledge of his possessions, or sometimes to see
and handle the coins or jewels, and the more he has of these
the more he wants This, however, is certainly not true
mJ[ 11115618 0X0 sometimes considered to be
ZZ’J t ° Ugh 7 6 ma ? not go so far as that, we must
th l r l them “ altogether exceptional, the economist

ordinary people b6CaU£e he 18 concemed

WANTS. SOME EXCEPTIONS 147

Next let us consider the case of men whose wants do not
seem to increase in number and variety The commonest
case is that of the religious ascetic : probably most students
have heard of wealthy men who have given up all the
enjoyments of ordinary people and adopted a life of religious
contemplation, perhaps even going so far as to depend on
charity for their food. Such cases are not rare m India,
though they cannot be described as ordinary ; that is po
say, the ordinary man does not adopt a religious way of life
as a matter of course What happens in this case is that
a single want or group of wants — which can be satisfied
only by certain religious experiences — becomes so intense
that all, or almost all, other wants become unimportant
in comparison. And this particular want is one of those
which cannot be satisfied by wealth, and so is outside the
economist's province He knows of its existence, and he
has to take note of the fact that the Production of wealth,
as well as the Consumption, is diminished in a community
where any considerable proportion of the members adopt
a religious way of life ; but he cannot argue about the
satisfaction of this particular want, because it cannot be
satisfied in the same way as the wants with which he is
concerned 1

1 At the present day the practice of adopting a purely religious
•way of life is probably much more common among tho Hindus than
among any other race or nation m the world, hut it is by no means
exclusively a Hindu practice It prevailed very widely at one time
among Buddhists of different nations, and also at various stages in
the development of Christianity. Everyone knows that a con-
siderable proportion of tliB Hindu ascetics ore not genuine, that is
that they are actuated by wants other than that of experiencing
certain religious feelings , and this has been equally true at tunes
in the case of other religions Tho English monasteries for instance,
before their suppression in the sixteenth century, had become of groat
economic importance, and the monks were largely occupied in the
production of wealth, and in some cases consumed it freely in the
satisfaction of the Ordinary wants of human nature

148 AN INTRODUCTION TO ECONOMICS

There are other similar cases where a particular want,
which hes outside the science of Economics, is felt so
intensely that the ordinary economic wants give way to it
There is, for instance, what may be called the want of self-
expression, which may drive a man to write books, or
paint pictures, or carve sculpture, not in order to hve by
selling his products, nor even for the fame which they will
brmg, but simply to satisfy the want which he feels The
economist cannot compare this want or other w'ants of
the same nature with those which he discusses, though
the fact of their existence is important to him
The economist then has to allow for the fact that certain
wants he outside the limits of his science He must

recognise that these wants are often the noblest part of
human nature, and that men who feel them most strongly
will act differently from the ordinary people whose actions
he is considering , but he also recognises that, as a matter
of fact, these wants — though they may be felt more or less
intensely are not felt so strongly as to determine the
actions of ordinary men in the ordinary affairs of life, and
it is these ordinary affairs with which he is concerned He

cannot take these nobler wants directly into account, but
he must recognise that their existence makes it likely that
a certain proportion of persons will act m a different way
om the majority, and thus, though he can draw con-
c usions as to the action of a co mmuni ty as a whole, he
cannot apply those conclusions to every individual in the
community ,, in fact he deals with ordinary men but has to
remember that extraordinary men exist also.

u ents will probably conclude from what has been said
abovethat there issomelackof definiteness m the hmitsof the
wants with which the economist deals This is true The
cience deals with a part of man’s life only, and it is not

WANTS* SOME EXCEPTIONS

149

possible to cut up life into absolutely separate and indepen-
dent divisions The economist looks mainly at the ordinary
material wants of an ordinary man, and at the ways in
which they are satisfied • here it is possible for him to draw
fairly definite conclusions. But the word * ordinary *
itself does not provide a definite limit, but is a question of
degree , 1 and different people will have different opinions
as to the point where ordinary life ceases and extraordinary
life begins. While therefore the mam subject of Economics
is clear, the exact limits of that subject cannot be stated
with entire precision It follows also, as has been pomted
out more than once, that the economist’s conclusions cannot
be used directly as a guide to action , before using them
as a guide, account must be taken of those parts of human
nature which the economist has not considered

A further limitation results from the fact that different
communities are at any time in different stages, and that
what is ordinary conduct in one community may not be
ordinary in another This fact causes practical difficulties
when people living in one stage have to study books -written
in another stage To take one obvious example, m England
the idea that a judge could be bribed to give an unjust
judgment is practically inconceivable, and economists
writing only from knowledge of England might say that
the integrity of a judge cannot possibly be measured m
terms of money. India is gradually approaching to this
stage, but even now cases sometimes occur where a judge
takes bribes, and not very long ago the practice was common,
that is to say, there were many judges who could estimate
m money the intensity of then desire for integrity At a
later stage of progress the desire for integrity becomes so

1 Compare the remarks on definitions and classification in Chapter
IV.

150 AN INTRODUCTION TO ECONOMICS

great that no conceivable amount of money will give an
equivalent satisfaction An economist writing in India
a century or so ago might have treated judges’ desire for
integrity as a motive that came within the scope of the
science , it is one of the many proofs of the progress made
by the country that he can no longer do so
Students must then expect to meet difficulties regarding
the exact limits of their science, and regarding the degree
to which its conclusions can be applied directly to the
affairs of life having said so much, we must leave these
difficulties aside for the present and return to our considers
tion of the ordinary daily wants of ordinary men.

CHAPTER XXI.

NECESSARIES AND LUXURIES

It is commonly said that when a man is deciding how to
spend his income there are some wants which he will
arrange to satisfy before he begins to think of providing
for others, and the things needed to satisfy these wants
are spoken of as Necessaries, while the other.thmgs which
he wants are called Comforts or Luxuries The distinc-
tion when stated in this way is not absolutely clear, and
requires a little more examination If we say a thing is
necessary, we must mean that it is necessary for some
purpose., and we can speak either of necessanes-fonexistence
or of necessa ries for e ffi cienc y ,

.'./Necessaries for existence mean the things which a man
must have in order to keep hims elf and his family ahve
In cold countries the term mcludes, m addition to sufficient
food and drink, a certain amount of clothing and also some
sort of a house for shelter , in the plains of India the
necessary amount of clothing and shelter is very small,
and perhaps a blanket for the winter is all that a man
absolutely requires, so that here the term necessaries for
existence means very little more than the small amount
of gram and water that is sufficient to keep people ahve
Necessaries for efficiency include more than this, everything,
that is to say, which a man must consume m order to work

152 AN INTRODUCTION TO ECONOMICS

efficiently at his occupation, -whatever it may be, and to
educate his children up to the point where they can he
expected to do as well as he has done In India the term
mcludes, first, considerably more food than is necessary for
existence , secondly, a certain amount of clothing ana
furniture, and a healthy house for shelter , thirdly, oppor-
tunities for medical treatment, and for education for a
man’s children earned up to the stage which he himself
has reached

The difference between these two classes of necessanes
is very great In India deaths from insufficient food are
now so exceedingly rare, even in times of famine, that it
may be said that the necessanes for existence are within
reach of the entire population , but on the other hand the

poverty of the country is shown by the small proportion
ot the people who enjoy all the necessaries for efficiency
Very large numbers, for instance, are unable to provide for
education or medical treatment, while healthy dwelling-
houses are rare, especially m the towns , a large proportion
of the artisans and labourers, and even of the smaller
cultivators, possess insufficient clothing for the cold weather,
while m many parts of the country the food of the labourers
is not sufficient to enable them to do a full day’s work
At the same time it must be recognised t ha t many of
theso people, who do not consume the necessanes for
efficiency, spend a relatively large share of their income on
things that cannot bo desenbed as necessary This is the
case in other countries besides India, and this class of
expenditure is spoken of as conventionally necessary • the
expenditure is not really necessary for the efficiency of the
individual who incurs it, but he is forced to mount by custom

1 T" ? pnWlc » - not possible to

B" O instance that it is necessary for the efficiency of a

153

NECESSARIES AND LUXURIES

labourer that he should spend several months’ income on
entertainments m connection with a marriage or a death
in the family , but if it is the custom, and his neighbours
and caste-brothers expect him to do so, he •anil incur the
expenditure 'and do without the necessaries for efficiency
which the money might otherwise have procured And
some ,s{udents probably know of families among their own
acquaintances which are insufficiently supplied with the
Necessaries for efficiency, while the members manage to
wear the stj le of clothing that is prescribed by the fashion
of the time and place

VThe ordinary man then will spend money on conventional
necessaries rather than on things that are really required
for his own efficiency and for the education of his family,
and the economist ins to take account of this fact We can
imagine a generous employer, who is determined that all his
workmen shall have all the necessaries for efficiency, sitting
down to calculate what wages ho should pay to each of them
in order to secure this ; he would consider the quantity of
good nourishing food, and its price, the amount and cost
of clothing, furniture, house-rent, school-fees, doctors’ fees
and so on, and he would pay each man a sum sufficient to
provide him with all he needed for himself and his family.
But if the employer did not take conventional necessaries
into account, he would very soon find that the consumption
of his workmen was not arranged in the way he expected
Some of them would be found eating inferior food, many of
them would bo living in unhealthy and badly-furnished
houses, and their children would not be getting a suitable
education , and if he enquired where the money had gone,
he would probably find that most of it had been spent on
these conventional necessaries, that the workmen had bor-
rowed money for mamage-feasts or other entertainments.

164 AN INTRODUCTION TO ECONOMICS

and wore paying to thou: creditor tho money that was meant
to be spent m keeping themselves and their fa mili es healthy
and efficient

Tho economist then, who considers thingB as they are,
must allow for conventional necessaries Tho man who
wants to improve the economic condition of tho country
must also recognise tho facts, and when he has recognised
them he must take such stops as are possible to persuade
the people to reduce their expenditure on these conventional
necessaries, and to apply then: income moro wisely. That
is to say, he must persuade people to change their customs
Students doubtless know that this attempt is bemg made at
the present time by leading men in various Indian com-
munities, and with a very varying measure of success
t w work that is well worth doing, but it is exceedingly
0 k ’ and progress as a rule must be slow, because
peope in general, and Indians in particular, are afraid
se ting up their personal opinion agamst that of the
community to which they belong, and it is very hard to

enoug people to aot together m securing a change
in custom

sanp^+iw 5 m C0imectl0n TOth conventional neces-
what ia At dent °* '® oonomics is concerned with

colZ^ ° r CUSt0m ’ or fao* of

It is well toT 6 affected to a greater or less extent, and
expressions t ° ear ldea °f w hat is meant by these
facts of hum a ^ CaS6 ’ agam » we must start from the

for those facte 11 ^tTa f ^ “J"? attempt to 8176 reasons
their own expenence +w’ Whloh 8tudents 00X1 venf y froin

thing in a Articular lay teX'te ^ T* ^ “f
same way rather tw 7 ^ ^ 1(5 go on dom S “ the

and the oftener he repeated wa y® of dom S xt »

repeats the same method, the less likely

KECESSAK1ES AXB LUXURIES 150

U ho to change xt And it is also a fact that a man who
life to do a thing for the iin,t time tends to do it m tho way
he t'i’i his neighbours doing it Thus a man who lives
entmly alone will develop habits or customs in all the
ordinary actions of his life, in his Mays of preparing and
l ".kmc food, in his clothing and the way ho puts it on, m
the tune at which he sleeps, and so on But, as a rule,
men do not live alone ; and in ordinary life they follow
the habits and customs of the people they see about them
Many of our habits and customs are formed while we aro
young children ; vre do tiring* m tho way we see our parents
and relatives doing them. And as w e grow older wo acquire
fmh habits and customs from the people with whom wo
come in contact : \a student on entering college models
hu< conduct on that of the other students , a young man
entering an office as clerk docs w hat tho other clerks do ,
and the same thing is true in the case of all occupations
The greater part, then, of an ordinary man’s life consists
of repealing action* which he has performed before, and
imitating the actions of his neighbours

If all men did nothing else but repeat and imitate, no
change could ever take placo in tho way of bfo of a com-
munity. This, of course, is not the case. Habits and
customs and fashions change gradually as surrounding
circumstances change • evoiy now and then a man finds
a new* and more convenient way of doing a thing, and bus
example is followed by his neighbours until the new* way
has become a fashion and replaces the old. If we compare
the life of a community this month with what it was last
month, wo shall as a rule find no visible difference in habits
or fashions ; but if wo compare tho life of to-day with
tho life of ten or twenty years ago, wo find that many
habits and fashions have changed in tho longer interval

156 AN INTRODUCTION TO ECONOMICS

Thus, changes m the habits and fashions of life take place
gradually , and one of the greatest differences between
different communities is the rate at which these changes
take place Some commumties change their habits quickly :
they are anxious to try any now ways of which they hear,
and if the now ways seem better they adopt them quickly
in place of the old ways There are many examples of
these progressive communities The Americans change
their habits and fashions perhaps most quickly of all;
m some respects certainly they chango them more quickly
than Englishmen Englishmen again change their habits
and fashions more quickly than Indiana , and among
Indians, the Bengalis and such races as the kayasths of
northern India chango more quickly than most of the
rajputs, or than cultivating classes such as the kurmis ,
The rate of change depends in great measure on the
opportunities for seeing and hearing of new ways / A
village of illiterate cultivators, who stay at homo almost
all their lives, will chango its habits and fashions much
more slowly than a town where some of the people can read
and write, where books and newspapers can be obtained,
where new things are seen in the shops, and where strangers
from other places come and go The great increase in
means of co mmun ication, which has already been mentioned
as an influence on Production, has undoubtedly quickened
the rate of change m Indian fashions and habits/, even
the villagers are affected, though less than the townspeople ,
and so far as can be foreseen the rate of change is bound
to go on quickening But at the present time the rate
of change m India as a whole is slower than in most western
countries, and consequently the influence of habit and
custom and fashion on consumption is greater m India
This influence is seen m the expenditure on conventional

NECESSARIES AND LUXURIES

157

necessaries which lias been discussed above, but it is exerted
also in almost all kinds of consumption, except perhaps
the actual necessaries of existence. Thus, oven where means
of education aro available, it sometimes takes a long tune
before villagers get into the habit of sending their children
to school : a dispensary may oxist for a long time before
all the classes in its neighbourhood get into the habit of
going there for treatment; or people remain satisfied
with the customary types of houses and the customary
amount and land of furniture when they have the money
to supply themselves until healthier and more convement
accommodation

We said at the beginning of this chapter that the things
other than Necessaries which a man wants are spoken of
as Comforts or Luxuries There is no real distinction
between the two terms Both alike denote things that are
not necessary for efficiency, but the ordinary use of the
word Luxuries conveys an idea of blame which is not con-
veyed by Comforts ; that is to say, when we speak of a
man spending his income on luxuries, we imply that m our
opinion he is not spending his mcome wisely, while when we
speak of Comforts we imply that the expenditure is more
or less justifiable. And in ordinary practice the use of
these words depends largely on the amount of income
enjoyed by the person whose expenditure is being considered.
Thus, we would speak of summer clothes made of silk as a
Comfort for a pleader or a merchant or a government
official ; but wo should call them a Luxury m the case of a
cultivator, or a servant, or a labourer. Or a carriage may
be called a Comfort for an elderly landholder, while it
would be called a Luxury in the case of a man m a more
humble position The distinction then is unimportant for
the science of Economics, and it is explamed here only

158 AN INTRODUCTION TO ECONOMICS

because students will find tbe w’ords used m their later
reading on the subject. Both •words alike denote thing3
which, while they are not necessary for the consumer’s
efficiency, are capable of satisfying wants which he ex-
periences.

CHAPTER XXH.

THE DEMAND OP AN INDIVIDUAL CONSUMER

We have now indicated m general terms the nature of the
wants with which the science of Economics is concerned,
and must turn to the way in which men try to satisfy those
wants For the ordinary man this is a question of how to
spend his i ncome, however it may be obtained ; ultimately,
of course, the question concerns the production of wealth as
well as its consumption, because men produce, that is, earn
an income, m order to consume , but for the present we
start with the fact that every man has an income, whether
it consists of gram and other things with which he can satisfy
his wants directly, or whether it consists of money with
which he can purchase the things he needs. The ordinary
man has an income which suffices to satisfy some, but
not all, of his wants, and his object is to spend it in suoh a
way as to get the greatest possible amount of pleasure
and satisfaction

We will introduce here two words which are commonly
used m Economics One of these is Commo dity , it means
simply a material thing that can satisfy a want, and does
not bring any new idea into the subject. It is used mainly
because the word ‘ thing * is somewhat indefinite, and a
word is wanted which will convey a clear meaning , we shall
use it in future in the sense which we have just explained

160 AN INTRODUCTION TO ECONOMICS

The second word is Utility lit is convenient to make use
of this word to signify the amount of pleasure or satisfaction
which is obtained by consumption^ The use of this word
also does not mtroduce any new idea , it is simply a con-
venient term to use for the quahties of things which yield
pleasure or satisfaction, that is, which satisfy wants in the
course of their consumption , and it follows naturally from
what was said in Chapter HI as to the nature of consump-
tion Man does not consume the matter of which a thing
consists , his consumption leaves the amount of matter
unchanged but leaves it in a less useful form, that is, he can
be said to consume the utility possessed by an aggregate
of matter, though he cannot be said to consume the matter

itself Nor does the word utility imply any pr ais e or any
blame as regards consumption , it is true that when in
common language we use words like useful, or utility, we are
t hinkin g of some purpose to be served ; but when the

economist uses these words the only purpose which ho has
in mind is the satisfaction of wants, and for him a commodity
is useful if it satisfies a want and not otherwise
Making use of the word utility, we can describe a man’s
object in spending his income as an endeavour to obtain
the greatest possible amount of utility} In order to plan
expenditure that will obtain the maximum of utility, a
man has to compare the intensity of his different wants
and decide which of them he can satisfy and whethei
aa can satisfy them completely or not This process is
fundamentally the same in all cases, but the choice to be
made by different men differs so much that the identity
is no a ways apparent (_For the labourer who earns, say,
wo annas y lug <ia.y s work the process is simple Very

0f moome g oe s to buy food foi
himself and his family, and the quality of the food is largely

DEMAND OE INDIVIDUAL CONSUMER 161

a matter of custom so long as prices do not change , he has
to consider how much food he can buy, and in ■what other
ways he can spend the two or three pice that may be left
after providing for his food , and he has to decide what will
give him the greatest amount of utility, a few more chat&ks
of gram, or a little tobacco, or some other luxury, or the
sdvmg up of the pice towards buying clothes or something
else that he will want later on In the same way the man
who has twenty or thirty rupees a month to spend finds that
most of his expenditure is settled for him , so long as prices
do not change greatly, and so long as his way of living does
not alter. After he has provided for rent, and for food, and
other regular expenditure, there are perhaps a few rupees
left and he has to decide how to get the maximum of utility
out of these , whether to buy a little more of Borne luxury,
or spend the money on clothes or something else, or agam
save it up for future use. So with the wealthy landholder,
or pleader or merchant, though his income is much larger
he finds that most of it is needed for his regular expenditure,
and that he has only to think over the disposal of what is
left of it.

Whether then a man’s income is stated in pice, or annas,
or rupees, or even in lakhs, most of it is spent as a matter of
course on commodities required for the way of life to which
he is accustomed, but there is usually a balance or margin,
the disposal of which has to be settled from time to time,
and it is in settling the disposal of this margin that a man is
really trying to secure a maximum of utility, whether
or not ho t hinks of what he is domg Some men have to
think whether it is best to buy just a little more gram
some men are hesitating whether to buy a few chataks more
gin , others may be doubtful whether to keep another horse,
or to get a motor-car ; but in all cases the object is the same

L

102 AN INTRODUCTION TO ECONOMICS

to secure the greatest possible amount of utility, and as a
rule the form that the questions take la . Shall I buy a little
more of this commodity, or of that 1 •which will gne the
larger amount of utility in consumption ? In other words,
people in ordinary times are concerned mainly with the
limi t of quantity of various commodities, up to which they
shall carry their consumption
Now let us take a concrete instance of a question of this
land, and see how the ordinary man answers it Let us
suppose that a man is planning his expenditure for the
month and wishes to settle just how much ght shall be bought
for his household The first thing to find out is clearly
the price at which ght can be bought, and we will take it
to be one ser per rupee He calculates that the house-
hold would really like to use ten sera m a month, but he
is quite sure that he cannot spend so much as ten rupees on
ghi, because the money is wanted more urgently for other
things He is satisfied on the other hand that he can afford
to buy four sera, so that the family can have some ght though
not so much as they would like Can he afford one ser more?
It will cost him a rupee, and there are many other things
which he wants, the utility of which he has to compare with
the utility of the fifth ser of ghi If there are several people
with the same income in this position, we can bo pretty
certain that they will decide the question in different ways
some will think that it is just worth their while to buy the
fifth ser, while others will decide that the money is more
urgently wanted for something else We will suppose that
the man whom we are considering decides after some
hesitation that it is just worth his while to buy the fifth
ser, hut that he certainly cannot buy any more The
consumption of his family for that month is then fixed at
five sera of ghi t and in the same way the consumption of

DEMAND OF INDIVIDUAL CONSUMER 1G3

otlwr commodities is ‘•el tied until the whole of his income
is accounted for

Ordinary people have not as a rule any clear idea regarding
the quantity of a commodity which thoy would buy if its
price were to change very groat h , but when a largo change
m price comes, t hev hav e to consider the question, and decide
on the amount to bo bought at a price materially different
from that to which they havo been accustomed It is
possible that the prico of pin, to continue the samo illustra-
tion, might n«e so high that the consumer would have to
give up its regular use, and either buy none at all or only
buy a few chafftk* for use on a feast-day ; it is also possible
that the price might fall so low that ho could buy all he
wanted without difficulty , but between these two extreme
limits, whatever the price might bo, ho would havo to
decide how much pin to buy If wo supposo that ho is a
man of judgment and experience, ho could make out a table
or schedule, showing llio quantity which ho would buy at
each price ; if wo follow the assumptions that have already
been made, the schedule would bo something like this

\\ lion tw

Htr coslo 0 rupcci or more, ho vould buy no gh*.

t»

J-0

ruptr*,

bo would buy 1

ser

ft

I! 0

t*

• •

t

3

ft

ft

I 4

n

It

ft

4

tt

ft

1 0

•»

ft

»

1

t»

ft

12 tuinni

»#

ft

6

tt

ft

8

•t

ft

ft

8

tt

ft

tt

4

„ or Ic_s „

ft

10

tt

These figures are, of course, imaginary, and are given only
as an illustration of tho way m which the amount a consumor
purchases vanes with the price w hich he has to pay When
tho pneo of a commodity is very high relatively to his
income, ho consumes none of the commodity, or at most

164 AN INTRODUCTION TO ECONOMICS

buys a very small quantity occasionally , at a low or range of
prices, ho may take the commodity into regular use, and
he will increase his consumption as the price falls, until ho
can satisfy his want completely , then he will buy no more,
however low the pneo may fall
A schedule such as that which we have given maybe called
a Demand Schedule It indicates the amount of a com-
modity which the consumer is prepared to buy at any given
price, and that amount is commonly spoken of as his Demand
at that price It is not easy to prepare such a schedule
accurately, because as we have said above, the ordinary
consumer cannot foresee what Ins Demand will bo at a
price greatly different from that to which he is accustomed ,
but students will find that the meaning of the terms u e have
used will become much plainer if they try to prepare for
themselves Demand Schedules of a few of the commodities
which they, or their families, are accustomed to buy To
prepare such a schedule the student should begin with the
current price, and set down opposite it the quantity of the
commodity which he bought last week, or last month, at
that price , he should then va j the price gradually, first
raising it and then lowering it, and set down opposite each
entry of price the amount that he thinks he could afford,
assuming that his income is unchanged, and that the prices
of his other articles of consumption are also unchanged
As he raises the price, he will finally come to the point
where he decides that he would have to give up the com-
modity, and as he lowers the price he will come to the pomt
w ere e can get all he wants , these points give the limits
to his schedule, and between those limits he will have the
quantities which he thinks he could afford at each price.

CHAPTER XXIII.

CHANGES IN A CONSUMER’S DEMAND

Wr have assumed m the inst chapter that the consumer has
to thmh of only a single commodity at a time, and wo have
assumed also that his income is unchanged. In real life
a man’s position is seldom so simple as this In the first
place, the prices of commodities are constantly changing,
and tho consumer has to take all these changes into account
and fix the amount of lus purchases accordingly Usually
some things will be rather cheaper, and other things rather
dearer than before, and ho will buy a little more of what
is cheaper and a little less of what is dearer, but his
decision in each caso is based on the same consideration,
tho endeavour to obtain tho greatest possible amount of
utility m return for tho monoy which he is able to spend
Tho economist docs not assume that every consumer
succeeds in this ondeavour , men ofton make mistakes and
fail to get tho maximum of utility, but the fact of importance
is that they try to get it, and a man s actual consumption
is determined by his own idea of utility and not by the ideas
of other people At present wo are concerned with the facts
of consumption, and not with schemes for showing people
what they should consume

When a man’s income is changed, the problem before him
becomes more complex because he has usually to make some

166 AN INTRODUCTION TO ECONOMICS

changes in his customary w ay of life, and so less of his
expenditure is determined by custom. If we suppose o
man’s income to be reduced by onc-balf, we can sec that his
way of life will have to bo changed almost entirely : ho must
as a rule go to live in a smaller house, get rid of some of his
servants, bo content with cheaper food and clothes, walk
where he was accustomed to drive, and do without many
things that he has hitherto consumed almost as a matter of
course Lot Ub see how a sudden reduction of income would
affect his Demand Schedule for a particular commodity
If we take the schedule given as an illustration in the last
chapter, we may be sure that at the present price of one
rupee he will buy less ghi than when lus income was larger,
—perhaps only two sers instead of five ho still wants as
much ghi as before, but he can no longer spare the same
amount of money for it because he has less money to Bpend
Again, it is fairly certain that ho would now have to give
up ghi altogether at a lower price than w hen his income was
larger, and that he will not be able to satisfy Ins want com-
pletely at the price where ho could have done so with a larger
income Thus his Demand Schedule will have the same
general form as before, but it will be lower throughout, that
is to say, at any given price he will buy less ghi than before.
The figures would compare somewhat as follows

Price

Es 6a a or
»» 4 „

»» 2 „

.. 1-4 „

» io„

As 12 „

ii 8 „

« 4 ,,

i. 2 „

Former

Present

demand

demand

ml

ml

1 esr.

ml.

3 „

1 ser

4 „

H »

5 i>

2 „

6 „

n „

8 „

Si

10 „

10 „

6 „

10 „

CHANGES IN A CONSUMER’S DEMAND 167

The same sort of chango would have to be made m his
Demand Schedule for all the commodities which he stall
uses, and in this way his reduced income would be distributed
so as to secure him as much utility as is possible m his altered
circumstances. On the other hand, if his income were
largely increased, the changes m his Demand Schedules
would be in exactly the opposite direction , he would now
be able to satisfy his want completely at a rather higher
pnce for each commodity, he would continue consumption
at prices where with a lower mcome he would have had to
give it up, and between these limits he would be able to buy
rather more than before at any particular pnce His
Demand Schedules would be raised throughout

When a large change of income takes place suddenly, aman
usually alters his way of life, and for the time being he has
few habits to aid him in settling his expenditure , but he
copies the habits of his neighbours, and the new way of life
very soon becomes habitual, and then (as before) much of
his expenditure is regularly incurred, and he has to think
mainly of the point up to which he shall carry his consump-
tion of particular commodities His position then is just
the same as before, except that the Demand Schedules have
been raised or lowered as the case may be, — raised if his
mcome has increased, and lowered if it has been diminished
Where the change of mcome is gradual, as in the case of a
pleader whose practice is improving, or of an official whose
pay rises by small periodical increments, the changes m
Demand Schedules are also gradual , the consumer’s way
of life is not changed suddenly, but the result in the long
rim is the same

Students will see then that the figures in a man’s Demand
Schedule must necessarily change with each change in his
mcome, but that the general form of the schedule does not

168 AN INTRODUCTION TO ECONOMICS

change , m every case there is an upper limit and a lower
limit, and between these limits the quantity demanded
mcreases as the price falls and diminishes as the price rises
The relation between Wants and Demand will be apparent
from what has been said above A man feels a Want, and
that is all that can be said about it , his Demand for a
commodity to satisfy the Want vanes with the pnce of the
commodity in the way that has been explained A coohe
probably wants ghi for his everyday food, but bis Demand
for it does not interest the sellers of ghi, because he
would only buy it at a pnce very much lower than that
which prevails If however the price of ghi were to fall bo
much that the coohe could buy Borne of it every day, then
his Demand would become effective, and it would then
interest the dealers On the other hand, as the price of-
ghi rises, it may become m excess of the upper limit of the
schedules of many consumers, and as they give up its use,
their Demand for it ceases to be effective To take an
extreme case, if the price were to rise so much that ghi could
only be bought for its weight in gold, there would be very
few purchasers left m India , the price would be so hi gh
that no ordinary person would t hin k of making a purchase,
and ghi would be bought only by one or two men m any city,
who might be willing to buy small quantities for use on
special occasions Ordinary people would continue to
want as much ghi as before but they could not possibly
demand it at that price

CHAPTER XXIV

DEMAND OF A COMMUNITY

So far we have spoken of the wants and the demand of
individual persons The student must know first the nature
of these, because communities are made up of individuals,
and the demand of a community is made up of the demand
of the individuals whom it comprises , but he must also
know the nature of the demand of a community, because
the science deals with communities rather than individuals
If nearly all the members of a community enjoy about
the some income and live in the same style, then a Demand
Schedule drawn up for an ordinary individual of the com-
munity will represent with fair accuracy the demand of the
community if the quantities Bhown m it are multiplied by
the numbers of tho community For instance, if we know
that an ordinary student demands two sers of ghi when
tho price is one rupee, and if thoro are 1000 students at the
college, all living m the same way and spending about the
same amount of money, then the demand of this community
of students at this price would be just about 2000 sers It
is true that tho community would mclude some students
who consume lather less ghi than the ordinary student, but
it is also true that there would be others who consume
rather more, and the excess of consumption of these will,
as a matter of fact, just about make good the deficient con-

170 AN INTRODUCTION TO ECONOMICS

sumption of the others, so that the consumption -a ill be just
about the same as if all the students consumed exactly the
same amount This is equally true of the consumption at
other prices, so that in a homogeneous community (that
is, one where the incomes of individuals and their ways of
life do not differ greatly) tho demand of the community ib
directly proportional to its numbers and can be accurately
represented by a schedule drawn up for any ordinary
individual

Where the community is not homogeneous, a little adjust-
ment is required in order to prepare a schedule that will
show the Demand of the whole To make such a schedule
it would ho necessary first to prepare schedules for each of
the different classes of which the community is comprised,
and then to combme them In an ordinary Indian town
for instance, we should have to prepare schedules of
demand, first for tho large class of families whoso income
is from Bix to eight rupees, then for tho class whoso
income is between ten and fifteen rupees, then for the
class of from twenty to thirty rupees, and so on , and
if we knew approximately the number of families con-
tamed m each class we could calculate the total demand
at each pnee for the entire population of tho town.
The preparation of such schedules would require a
considerable knowledge of statistics and also some judg-
ment m their use, as students will find when they come
to study statistics , but tho important pomt is that such
a schedule, though it would be longer, would be of precisely
the same type as the schedule for an ordinary individual
For any commodity there would he a limit of price so high
that no one in the town would think of buying any of it ;
if there are very nch men living in the town, tins limit
might he very high as we saw in the last chapter, hut it

DEMAED OF A C03BIUNITY 171

would exist And in the same w ay there w ould be a limit
so low that c\en the poorest classes could satisfy their
wants completely, though it would be a very low limit
indeed And between these limits there would be the fact
already noticed that the demand would increase as the price
falls, and would decrease os the pnee rises

This in fact is the general Law of Demand, and it is true
of very nearly every commodity and very nearly every
community , a rise in price diminishes demand, and a fall
in price increases demand. This law’ has sometimes been
stated in such a way as to lead people to tlunk that the
relation between price and demmd is proportional, m the
arithmetical sense of the word , that is to say, that if the
' pnee is doubled, the quantity demanded would be reduced
to one-half, and so on It is certainly not the case that any
general statement can be made os to the proportion in the
case of all commodities and all communities , enough is not
yet known of the facts of consumption to enable us to make
statements as to the proportion m the case of particular
commodities, and this is a line of study which ought to
yield valuable results to Indian economists, who have the
advantage of more extensive statistical information than
many countries enjoy, especially in the octroi returns of a
large number of towns and cities Further study then may
make it possible to deduce laws regarding the proportionate
variation of demand and pnee m the case of some classes
of commodities, which would be a valuable addition to the
science , but at present the Law’ of Demand can only
indicate that demand will rise or fall, add cannot indicate
by how much it is likely to change in the case of any par-
ticular commodity

lake other economic laws, the Law of Demand is not
entirely without exceptions, but they are rare and of little

172 AN INTKODUCTION TO ECONOMICS

practical importance. One exception is found in the case
of co mmo dities -which have little or no utility except their
rarity. At present people pay very high prices for diamonds
because they are very scarce and the ownership of them
gives distin ction ; hut if diamonds v ere to be sold at the
price of glass it is probable that very few people would buy
them at all, so that in this case it is not certain that a very
large fall in price would be followed by an increase m demand
On the other hand it is possible that if diamonds could be
bought by the ser or the maund, some new utility would
be found m them, that is to say, they might be found useful
in satisfying some want other than the desire for rarity,
and m that case the demand might be largely increased
There are also possible cases where a nse in price may be
followed by increased demand In a famine, for instance,
the prices of all food-grains rise very high , many people
who in ordinary times eat wheat-flour are then unable to
buy it and buy coarser and cheaper grains such as millets or
barley instead, and the demand for these may thus increase
v hen the prices rise Students will find it instructive to see
if they can think of other exceptions to the general law ;
they will not he able to discover many, hut the attempt
to do so will give them a definite idea of the extent to w hich
the Law itself is true m ordinary life.

The exception last mentioned leads us to a point which
requires a short notice m order to make the account of
demand correspond more accurately with actual facts.
It is rare to find that a particular want can be satisfied only
by a particular commodity , as a rule there are several
commodities, any one of which will satisfy the want and
the use of one of these rather than the others is partlv a
question of price and partly also a matter of habit and
custom Thus in the case just given the want of food can

DEMAND OF A COMMUNITY 173

be «afispcd h\ the use of barley or millets as well ns by the
u<m> of -wheat , and in the same wav various vegetable oiJb
can take the place of ghu People m a certain position are
accustomed to use wheat and ghi, and they keep to these
as Ion" as they can ; but whon prices n^e greatly they may
find them selves forced to uso tho cheaper substitutes
Mtmv jietvons again are accustomed to drmlc spirits to
their want for stimulation ; but when spirits are
haul to get and very expensive, some consumers will uso
other stimulants instead, possibly opium, or drug3 propared
fr<-m hemp or other plants, or on tho other hand tea or
coffee The effect of this principle is to modify the figures
in a Demand Schedule for any particular commodity, but
not to change tho shapo of tho schedule itself. Tho extent
of its practical importance varies greatly among different
communities In those where tho force of custom is strong,
people satisfy their wants os long as possible in the wav to
which the}- are accustomed, whilo m others they are much
readier to change their ways, and are oven m some cases
anxious to try every new way of satisfvmg an old want
Thus whenever avo attempt to study tho consumption of
any particular commodity, wo have to consider both
the other commodities which can take its place, and
the rapidity with which customs change m tho com-
munities which are being studied This side of the question
is often overlooked in actual lifo Students have no doubt
heard or read of tho enthusiastic temperance reformers
who endeavour to stop tho consumption of spirits in
some communities. Some of them are apt to think that
their object could be achieved at once if the manufacture
and sale of spirits were stopped, and they look to the
government to do this But experience in India, as well
as m other countries, shows that this course will not prevent

174 AN INTRODUCTION TO ECONOMICS

people from ■wanting stimulants , so long as thoy want
stimulants, thoy will consume the stimulants they can got,
and if they cannot got spirits they will take some of the very
dangerous drugs that will satisfy their want The men who
wish to effect a change m consumption (whether of spirits
or of any other commodity) must attain their object mamly
through tho consumers , that is to say, they must persuade
the consumers to leave tho particular want unsatisfied, or to
satisfy it in ways that are not open to objection Wants
such as the want of stimulants are very largely tho result
of custom and fashion, and, as we have seen, people can be
persuaded to change their customs and fashions, and then
the want will be no longer felt or will be felt much less
intensely Tho question of temperance reform is one of
great importance, but it cannot be discussed fully without
a wide knowledge both of Economics and of other sciences
that deal with human life , it is mentioned here merely
as an illustration of the land of problem that has to be
considered m connection with consumption and demand
In showing how an individual’s demand for a commodity
could be set out m the form of a schedule, we had to confino
our attention to such commodities as are bought regularly
in small quantities. (It is not possible to make out a schedule
of an ordinary individual's demand for commodities which
he only buys occasionally and which last for a long time ,
we cannot, for instance, sot out in this way an individual
student’s demand for Bhoes, or tennis bats, or watches, or
bicycles j But in the case of a co mm unity, it is possible to
make out schedules for such commodities if the co mmuni ty
oe large enough (Thus m a college of 1000 students, there
are always some students who are t hin king of buying new
shoes, or new tennis bats, but doubting whether the utility
to be obtained is worth the price If the price falls, some

DEMAND OF A COMMUNITY 175

of these will decide to purchase, and the lower the price the
moro purchases will be made , while if the price rises, the
purchases will bo fewer, as some students will decide to wear
their old shoes longer or to do without a tennis bat It is
almost impossible to get enough information to enable us
to proparo complete Demand Schedules in such cases, but
we can see that the schedules must be of the same general
shape as those for commodities like ghi, and that the Law
of Demand applies equally in their case Again, m a town
of 10,000 inhabitants, the number of people who on any
given day are thinking of buying bicycles is probably so
small that no definite statement could be made as to the
number that would be sold at different prices, and the price
might rise or fall largely without making much change in
the number sold ; but m a city with several lakhs of
inhabitants, the number of possible buyers may be so large
that every change m price will affect the number sold, just
as every chango in pneo affects the sale of ghi The Law
of Demand thus holds for all classes of commodities (subject
to a few exceptions already dealt with) in every community
where actual or possible purchasers of the commodity are
to be found in considerable numbers, and the larger the
number of purchasers the more closely will the Demand
vary with every change m price

book iv.

demand AND SUPPLY.

CHAPTER XXV.

PRELIMINARY CONSIDERATIONS

We have now discussed the conditions under which wealth
is produced and consumed , m the present Book we have
to see in what way the production of particular commodities
is adjusted so as to provide the amount required for con-
sumption. This adjustment is usually spoken of as the
Equilibrium of Demand and Supply Demand as we have
seen means the quantity of a commodity demanded, and
it vanes according to the price at which the commodity
can he bought Supply means the quantity of a commodity
offered for sale, and as we shall see later on this quantity
also vanes with the price. The quantity of a commodity
offered for sale must depend m the long run on the quantity
produced, and so the terms Supply and Production are
closely connected together and refer to the sellers, just as
Demand and Consumption are closely connected together
and refer to the purchasers Equilibrium means literally
even-balancing, and the word can be applied to scales m
which thin gs are weighed, when the two sides balance
evenly , for our present purpose the word indicates that the
Demand and the Supply balance, that is that they are equal
Stated in a concrete form, the question for consideration
is this . How does it come about that a particular quantity
of wheat, or gr/tt, or cotton cloth, or a particular number

180 AN INTRODUCTION TO ECONOMICS

of ■watches, or bicycles, or parrs of Bhoes, or any other
commodity, is produced and sold at a particular price ? In
what way is the quantity or number determined, and how
is the price fixed ? The answer to this question is the
central part of the science of Economics.

Students will notice that there appear to be two questions,
and not one there is the question of quantity or number,
and there is the question of price One of the chief diffi-
culties in Economics arises from the fact that it is not
possible to treat these two questions separately, and to
say either that Supply and Demand determine Price, or
that Price determines Supply and Demand As we shall
see more clearly later on, these three things are inter-
dependent, and a change in any one of them is likely to
lead to changes in the other two a fall m price usually
leads to a reduction in the quantity offered and to an
increase in the quantity demanded . an increase m the
quantity offered usually leads to a fall in price and to an
increase in the quantity demanded , an increase in the
quantity demanded usually leads to a rise in price and an
increase in the quantity supplied We are compelled,
therefore, to treat the two questions together , and when we
are for the moment looking at a change m one of the three
quantities, we must bear in mind that all the three quantities
are liable to change, and that any change in. one is both
a cause and a consequence of changes in the others
So far as the earliest stages of production are concerned,
there is little difficulty in answering the question that is
now before ns To take the simplest possible case, we may
consider men living m a forest who get their food by pick-
ing fruit from the trees A man starts out very hungry,
that is to say his want for food is intense he goes through
the forest picking fruit and eating it as he goes , as he eats.

PRELIMINARY CONSIDERATIONS 181

bis want for food gets less intense, and at the same time he
begins to get tired with the effort of walking and of reaching
or climbing for the fruit If there is plenty of fruit close at
hand, he will satisfy his want completely before he gets
tired , but if the fruit-trees are far apart and the fruit is
difficult to reach, he may get tired of the exertion before he
has had a full meal, and ho has to decide to bear either the
unpleasantness of further fatigue, or the unpleasantness of
the unsatisfied want of food. The want of food grows less
as he eats, that is to say the utility to him of more fruit
becomes steadily less, and at the same time the unpleasant-
ness of fatigue becomes steadily greater Or we may
describe the unpleasantness of fatigue as the want of rest,
and say that while the utility of food is decreasing the
utility of rest is increasing Sooner or later then he will
want rest more than food, and will he down and go to
sleep In this case the man balances, one against the
other, tho utility of food and the utility of rest , when he
is very hungry, that is when the utility of food to him is
very great, the utility of rest is negligible in comparison ,
but as time goes on, the two become more nearly balanced,
and at last the utihty of rest becomes the greater
In the early stages of production then, when men are
producing for their own consumption, and think neither of
selling nor of buying, they balance the utihty of the com-
modities produced against tho efforts and unpleasantness
required to produce them With plenty of fertile land and
good cattle, a cultivator may produce all that his family
wants, without excessive effort on his part , but if his
holding is small, or his land is poor, or his cattle are weak,
he may decide that it is best to leave some of his wants
partially unsatisfied, because the extra effort required to
satisfy them completely is not worth his while

182 AN INTRODUCTION TO ECONOMICS

It is sometimes convenient to have a single word to
denote the efforts and unpleasantness in\ olvcd in the pro-
cesses of production those arc, as wo have seen, just the
opposite of Utility, and if we speak of them as Dis-utility,
then we may say that the cultivator balances the utility
of the thin gs produced against the dis-utility of producuig
them, and carries his production up to the point where
the dis-utility involved becomes as great as the utility
The matter becomes more complicated when we pass to
the later stages of production, in which men buy most or
all of what they consume, and sell most or all of what they
produce In this case, as we have seen in the last Book,
the purchaser balances the utility of the commodity, not
agamst the dis-utihty of producing it, but against the price
that he has to pay , and we have now to take up the con-
sideration of the seller’s part in the transaction Before,
however, we enter on this, we must understand the meaning
of the word Market, which we shall have to use frequently
m the following chapters In every-day language, the word
is used m at least two meanings The most familiar of
these in India is probably the meaning which it bears m
municipalities , m this sense a market is a building or
enclosure where several lands of provisions and other goods
are offered for sale under conditions regulated by the
municipality This is not the kind of market with which
we aTe concerned The other meaning of the word is
indicated in such terms as the stock-market, or the wheat-
market, or the rice-market, which may be seen m the com-
mercial columns of the newspapers, and these markets
approach closely to what the economist means by a market
We may define a Market for any commodity as a place or
region where buyers and sellers of it are in free intercourse
with one another. The buyers and sellers may all be in one

PRELIMINARY CONSIDERATIONS 183

place, as in the gram-market or the cotton-marlcet of an
up-country town ; but this is not a necessary condition, if
the postal and telegraphic facilities are such that people
can maintain free intercourse while living at a distance
Thus, almost the whole of northern India forms one stock
and share market, with its centre in Calcutta, and people
in Lucknow or Cawnpore or Delhi or Lahore, who want to
buy stocks or shares, carry out their transactions m Cal-
cutta with the .aid of the post or telegraph
In order, however, to study the conditions that prevail
in a market, it is best to devote attention in the first place
to one where the buyers and sellers meet in one place *
such markets are to be found m all Indian towns of any
importance, and they deal m commodities such as gram,
or cotton, or sugar, which are produced m the locality.
There are numerous traders who have their places of busi-
ness close together , at any given time some of these want
to buy the particular commodity dealt with in the market
and others want to sell , and the same trader will some-
times be a seller and at other times a buyer of the same
thing. Traders, whether they are sellers or buyers, have
to think of a large number of factors even m a small market
sellers want to know the buyers’ Demand, that is the
quantity which will be bought at each price ; buyers want
to know the sellers’ Supply, that is the quantity that will
be offered for sale at each price , each seller wants to know
the position of the other sellers, and each buyer wants to
know the position of the other buyers , all alike want to
know whether prices are going to be higher or lower in the
near future, whether the consumers’ demand is likely to
increase or dimmish, and what is the prospect of an increased
or reduced supply. Even a small market then is a com-
plicated organisation , and w hen the same commodity is

184 AN INTRODUCTION TO ECONOMICS

dealt with m various markets, and can be brought from one
to the other, the complication may become very great
A dealer in wheat in Cawnpore, for instance, must know
as much as possible not only of the position m the Cawn-
pore market, but also of the other large markets in India ;
he must think of Delhi, and Hathras, and Calcutta, and
Bombay, and Karachi And, further, he must think about
other countries, so that an up-country trader in India
sometimes wants to know the attitude of traders m London,
and Liverpool, and New York and Chicago We must,
therefore, approach the study of a market by degrees,
taking first very simple cases, and gradually mtroducmg
new considerations until we can form an idea of the working
of an actual market

There are, however, two points which are common to all
markets In the first place, sellers want to get the highest
possible price, and buyers want the lowest possible price ,
no trader will sell wheat at three rupees a maund if there
is a buyer present who will give three rupees and one anna ,
and no buyer will give three rupees if there is a trader
ready to sell at two rupees and fifteen annas The buyer
then wants to know the prices that all sellers are asking,
and the seller wants to know the prices that all buyers are
offering The second point follows from the first ; at any
one moment there can be only one price at which sales
actually take place, though that price may change fre-
quently even in the course of a single day A seller must
know not only what buyers are offering, but what other
sellers are asking, because it is no use for him to ask a
higher price than others ask , and in the same way a buyer
must know what other buyers are offering, because it is no
use for him to offer less We have now to see how such a
market will settle on a particular pnce

CHAPTER XXVI.

TEMPORARY OR MARKET EQUILIBRIUM.

We must begin this study of equilibrium m a market with
a simple case, and we will take a market for wheat lying so
far from the railway that wheat does not reach it from a
distance, and that export is not practised We will assume
also that cultivators do not bring their own wheat to market,
but sell it to traders m their village, and that these traders
are the sellers in the market , the buyers are the shop-
keepers, who will sell it retail to consumers m the town
Markets of this type were formerly common in India, and
they are still to be found, though the construction of rail-
ways has now made most of them largely dependent on
import or export We will also suppose that there is no
combination between sellers on the one hand or buyers on
the other, but that each individual is buying, or selling,
independently and for his own interest Let us consider
the working of such a market early in December, m a
season when the next crop of wheat has been sown on
about the usual area and the crop has made a fairly good
start, so that there are no unusual circumstances to take
into account On the morning of the market-day the
traders will come in from the villages with carts or pack-
animals carrying the quantity of gram which they think
they can sell. They know (and the shopkeepers know too)

TEMPORARY OR MARKET EQUILIBRIUM 187

pncc , they do not know of a reason, but they infer that
for some reason or other more wheat is wanted for con-
sumption, and they raise their pnce by two annas a maund
At this price perhaps none of the shopkeepers will buy ,
then one or two of the traders ask three rupees one anna,
and at this price transactions begin to take place, some
shopkeepers buying and others still holding aloof m the
hope that the price will agam fall. As the day goes on the
market gets to know that a large body of troops is shortly
coming to the neighbourhood for tra ining , and that this
was the reason why some shopkeepers were anxious to
buy, because they knew that the demand for wheat for
consumption would be mcreased by the presence of the
troops The shopkeepers who did not know this, and have
so far made no purchases, now become anxious, as they
see that a good deal of the stock has been sold, and they
begin to offer three rupees one anna , but the traders will
see their anxiety to buy, and will agam raise the price for
the wheat they have left Some shopkeepers will now
reduce their purchases and buy less gram than they in-
tended the price will probably fluctuate for a time, some-
times rising and sometimes falling, according as the re-
maining shopkeepers press forward to buy or hold off for
a time, and by the evening the entire stock will have been
sold, at prices somewhat higher than those that prevailed
on the previous market-day
Next, let us watch the market early m January, sup-
posing that there has been good ram at the end of Decem-
ber, and that the new wheat-crop is promising to give an
exceptionally large yield It will be remembered that the
traders as a whole have a larger stock than is required for
consumption up to harvest-time , and those traders whose
stock is large will now begin to get anxious. They have no

TEMPORARY OR MARKET EQUILIBRIUM 189

recognise at once that they will have to pay much higher
prices, and so will require much less wheat, than usual.
Perhaps they will begin by offering three rupees eight annas,
Mlule the traders begin by asking four rupees Possibly
a little mil at first be sold at one or other of these extreme
prices, but there will be the usual bargaining and hesitation,
and eventually the market-price will settle at perhaps three
rupees tMelvo or three rupees fourteen annas
Tins description of the course of a market leaves out
many complications that occur even in a small local market
in ordinary life ; but it is intended to bring out clearly the
central fact of the equilibrium between Demand and Supply,
and the complications do not alter this fact, though they
may make it harder to see The buyers are guided by what
they know about the Demand of the peoplo for whom they
are buying * they know by experience that the consumers
in the town will buy a certain quantity of wheat at any
particular price, and that this quantity falls as the price
rises They are buying merely to sell again . if they buy
too much, they will not be able to sell it all at the corre-
sponding price, and will lose the profit they hoped for on its
sale If, on the other hand, they buy too little, they will
not have enough to sell at the corresponding price, and will
lose profit they might have made on the larger quantity 1
The sellers, on the other hand, are only anxious to sell for
the highest possible price, and the higher the price the
more they will sell The function of the market, that is
of the free intercourse between buyers and sellers, is to

1 It is of course possible that the buyors might see a chance of
getting a larger profit by offering a small quantity at a very high
price than a larger quantity at a lower price Shopkeepers are
occasionally suspected of such action, especially in the early stages
of a famine , but the more usual position is that the largest profit
is made by the largest possible sales

188 AN INTRODUCTION TO ECONOMICS

use for the wheat except to sell it, and they fear that when
the new crop is harvested the supply may be so large that
prices will fall substantially , so they decide to try and sell
as much as possible before this fall m price occurs Those
traders then who have a large stock bnng rather more
gram than usual to tins market, with the result that the
total supply is, say, 2200 maunds But the shopkeepers
also have been considering the weather and the prospects
of the next crop , they know of no unusual requirements
for consumption, now that the troops have left the neigh-
bourhood , and when they see signs that the supply is
larger than usual and that some holders are anxious to sell,
they will at once begin to offer less than the usual price of
three rupees Then there will be bargaining and hesitation
as before, but unless the traders are prepared to take some
of their stock home again they must accept lower prices
m order to dispose of what they have brought There is
again equilibrium between the amount demanded and the
amount offered, but the equilibrium is at a lower price.

Let us take one more market-day, and let us suppose
that a few days before it a severe frost has occurred at the
critical period when the crop is hable to damage Both
traders and shopkeepers know that the new wheat crop
has been severely injured , it is too early to estimate the
yield, but they have reason to think there will not be
enough wheat to supply the town with 2000 maunds a week
or the whole year Then all the traders will see that they
are m a position to ask for higher prices at once , any
quantity not sold now will be sold later on, and they do
no want to sell much at once, because they cannot yet
estimate what the future supply will be So on this day
e supp y rought to market is seen to be very small,
perhaps only 1200 maunds m all, and the shopkeepers

TEMPORARY OR MARKET EQUILIBRIUM 189

recognise ai onco that thcj will have to pay much higher
prices, and so will require much loss wheat, than usual.
Perhaps (hoy will begin by offering throo rupees eight annas,
while the traders begin by asking four rupees. Possibly
a little will at first be sold at one or other of these extreme
prices, but there will be the usual bargammg and hesitation,
and e\ cntually the market-price will settle at perhaps three
rupees twelvo or throo rupees fourteen annas
This description of the course of a market loaves out
many complications that occur even in a small local market
m ordinary life ; but it is intended to bnng out clearly the
central fact of the equilibrium between Demand and Supply,
and the complications do not alter this fact, though they
may make it harder to see The buyers aro guided by what
they know about the Demand of the people for whom they
aro buying they know’ by experience that the consumers
in the town will buy a certain quantity of wheat at any
particular pnee, and that this quantity falls as the price
rises They aro buying merely to sell again : if they buy
too much, they will not be ablo to soil it all at the corre-
sponding pnee, and will lose the profit they hoped for on its
sale If, on the other hand, thoy buy too httlo, they will
not ha\ e enough to sell at the corresponding price, and will
lose profit they might have made on the larger quantity . 1
The sellers, on the other hand, are only anxious to Bell for
the highest possible pnee, and the higher the pnee the
more they will sell The function of the market, that is
of the free intercourse between buyers and sellers, is to

1 It is of course possiblo that tho buj ora might see & chance of
getting a larger profit by offering a small quantity at a very high
pneo than a larger quantity at a lower price Shopkeepers are
occasionally suspected of such action, especially in tho early stages
of a fnmino , but tho more usual position is that the largest profit
ia made by tho largest possiblo sales.

190 AN INTRODUCTION TO ECONOMICS

find out the price at which the wishes of the two classes
will coincide , the individuals in each class have to find out
as best they can both the views of the other class and the
views of the other individuals of their own class, and the
extent to which they are able to do this is an indication of
the degree to which any existing market approximates to
the perfect market of our definition

In the next chapter we shall indicate some of the chief
complications which m this first sketch we have left out
of account, but before turning to them there is one point
worthy of notice in the description that has been given.
People are very apt to become angry with those who possess
a supply of an important commodity, such as wheat, when
they raise the price, as we saw it raised on the occurrence of
the frost “ These traders were ready,” it will be said, “ to
sell at three rupees , what right have they to raise the
pnee to four rupees and make poor people go hungry ? *
Now the student of Economics is not interested in tho
question of right , he knows that as a fact owners of a
commodity will raise the price in such circumstances , he
knowB that legally they have a right to do so ; and he
leaves the question of moral or religious nght to be dealt
with by the teachers and preachers who tell people what
they ought to do But the economist can pomt out that
the effect of this raising of prices is to secure a provision of
food later on for persons who might otherwise starve
This fact will become plain if we look back for a moment to
the first stage of Production, and see what would happen
there on the occurrence of a calamity such as a severe
frost The cultivator, who is growing food for his own sup-
port, will see at once that, as a result of the injury caused
by tho frost, he will not haye enough gram to feed his
family until the next harvest , he had calculated that the

TEMPORARY OR MARKET EQUILIBRIUM 191

yield of the spring crops would be sufficient for this purpose
until about October or November, when the aut umn crops
would bo harvested, but he now sees that if he continues
to consume gram at the ordinary rate Ins stock will be
exhausted in July or August. He must, therefore, as a
prudent man reduce his consumption of gram at once , and
reduce it so much that his existing stock and the yield of
the spring crops taken together will last until the autumn
crops arc ripe He and his family must then go through
the summer with insufficient meals , but they will, of course,
do whatever they can to supplement these meals by gather-
ing wild fruits, and by growing vegetables or garden crops
that will give additional supplies of food during the period
of scarcity.

Now this is exactly what happens in the town when the
traders of our illustration raise paces If they contmued to
sell at pnees which would allow of consumption continuing
at the rate of 2000 maunds a week, then the entire stock of
wheat would be consumed some time durmg the following
summer, and by the winter there would be no wheat left
The effect of their raising paces is to make the consumers
reduce their consumption at once ; they can no longer get
full meals of bread made from wheat, and must live on meals
reduced in quantity and supplemented by any other kmd
of food they can get, and m this way the stock of wheat
is economised (in the ordinary sense of the word), so that
there shall be some wheat available throughout the whole
of the peaod of scarcity, instead of the whole of it being
consumed in the early stages

CHAPTER XXVII.

MA RKET EQUILIBRIUM SOME COMPLICATIONS

We will now notice some of the chief complications that
are found m the actual working of a markot In the first
place, we may suppose that some cultivators bring their
w heat for sale m the market, and that thus the entire
supply is not m the hands of traders In markets where
cultivators bring a considerable proportion of the total
supply, the position of both buyers and sellers is rendered
more difficult Cultivators cannot know so much about
the conditions either of demand or of Bupply as the traders
and shopkeepers, whose mam business it is to acquire
this knowledge , they will be influenced mainly by what
they have heard as to the price which prevailed last market-
day, but they will also be influenced by other considera-
tions, especially by their need of money at the time Thus
it may happen on any particular day that the supply of
wheat is much larger, or much smaller, than usual, because
many culti\ators, or very few, cultivators have come m:
the general course of the market will not be affected, but
traders may find that the price must be lowered, or shop-
keepers that they must pay higher prices because of this
unexpected condition In any case the cultivator is not
likely to get the best possible price he cannot estimate
the stocks and the intentions of the people present as

MARKET EQUILIBRIUM GOSIPLICATIONS 193

accurately as the regular traders and shopkeepers, and if
— as is usually the case — ho is pressed for money, he will
probably accept the offer of a shopkeeper and sell at a
somewhat lower price than the conditions of the market
w ould justify. This sort of thing happens in all markets ,
some dealers are more expert and have better judgment
than others, and are thus often able to get a shghtly higher
price if they are sellers, and a shghtly lower price if they
are buyers, than other dealers who are less expert , and
some dealers may for private reasons be forced to sell or
buy at prices w Inch in other cases w ould not satisfy them
The consequence is that m actual life it is very rare to find
the whole supply in a market sold exactly at the equi-
hbnum-piicc foi the conditions prevaihng , some will have
been sold rather cheaper, and some wall have been sold
rather dearer, accordmg to the needs and capacities of
individual dealers, but as a rule the total sum of money
realised will be found to agree very closely with what it
w ould have been if all sales had taken place exactly at tho
equihbrium-pnce

Next we may notice the comphcations resulting from the
possibility of import and export We may suppose that
a railway has been opened to the town which we have been
considering, so that import and export becomes possible,
and that representatives of merchants from Calcutta or
Cawnporo attend the market to buy wheat if they can get
it at prices that suit them When they first make their
appearance, tho whole market will be disorganised , the
traders who have brought wheat to sell will have no idea
what these new buyers want, and the shopkeepers will be
equally ignorant But they will soon get accustomed to
the change they will find that these merchants are just
m the same position as the shopkeepers in that the amount

N

194 AN INTRODUCTION TO ECONOMICS

they will buy depends on the pnce, that is, they will buy
more as the pnce falls and less as the pnce rises. There
are now more buyers in the market than before, hut the
method by which an equilibrium-price is reached remains
unchanged The local men have, however, difficulty m
forecasting the action of the buyers from a distance :
they have learned by experience the local Demand and the
local Supply, but the merchants besides taking account
of these factors think of the market conditions in Calcutta
and Cawnpore and elsewhere , they may buy very largely,
and so raise pnces, because they know that prices are
higher still in Calcutta, or they may abstain altogether
from buying and so send pnces down if they know that
pnces m Calcutta are low Thus the local men must
extend their knowledge if they are to succeed in their
business (the business that is of selling at the highest,
and buying at the lowest, possible pnces) ; they must
learn as much as they can of the course of pnces m the
markets with which their market has become connected,
so that they may be m a better position to forecast the
action of the merchants who come from those markets
This change from mdependent to inter-connected markets
has taken place rapidly m northern Tndia during recent
years, and markets such as that descnbed in the last
chapter are now the exception, where formerly they were
perhaps the rule Even m quite small towns, the dealers
m wheat, cotton, and other staples maintain close relations
with the larger markets , it is by no means unco mm on for
up-country merchants to get a telegram every mo rnin g
indicating the course of the markets in Calcutta, while
at times of special activity telegrams from London or from
Chicago may be read m towns of which ordinary people
scarcely know the names

MARKET EQUILIBRIUM : COMPLICATIONS 195

A third series of complications arises when the buyers,
or the sellers, m a market combine together instead of
competing with one another We may suppose that in
the market desonbed in the last chapter all the dealers
come to an agreement as to the amount of wheat to be
offered and the price at which it will be sold , they might
then be able to maintain the equilibrium at this price, and
the individual shopkeepers could merely take the amount
offered at that price This comphcation is not uncommon :
in some countries the legislatures are actively engaged in
endeavouring to prevent such combinations (known as
monopolies, rings, trusts, combines, and by other names)
from raising prices beyond the point that is considered
reasonable ; and economists have m recent years devoted
a large amount of study to the theory of combinations and
monopolies Students will have to make themselves
familiar with this subject at a later stage , for the present
it is sufficient for them to know that a combination of
buyers or sellers may, at any rate for a tame, make a
material difference in the quantity of a commodity sold
and in the price which it fetches

Next, allowance must be made for the fact, which has
already been indicated m the previous Book, that as a
rule a want can be met by more commodities than one,
and that if a particular commodity rises m price consumers
are hkely to use some other commodity m its place Thus
merchants who deal mainly m wheat cannot confine their
attention to that gram, but must know also the conditions
of demand and supply m relation to other grains, such as
barley and millets and pulses If some of these are cheap
when wheat is dear, consumers will substitute them for
wheat, and then the Demand for wheat will fall more
than if no substitute for it were possible ; or, on the other

196 AN INTRODUCTION TO ECONOmCS

hand, the demand for u heat may bo mcreased by a failure
of the nee crops if rice becomes so dear that consumers
substitute wheat for it Even in a small market, then,
dealers can rarely confine their attention to a single gram,
but must know all they can about supply and demand in
the case of each of tho grams ordinarily used as food , and,
as a matter of fact, the trade in the vanous grams is very
often conducted by the same set of dealers

Next we come to the important question of holding up
stocks We have supposed for the sake of simplicity that
dealers bring a certain quantity of wheat to market and
take none of it back But in practice, and especially where
a dealer has his store near the market, this is not the usual
case , the commodity need never be exhibited m the
market, or it may be sent back to the store unsold Thus
sellers can offer much or httle according as they see the
demand to be bnsk or slack, and buyers cannot often judge
of the amount that is available for sale merely by the
number of carts or sacks actually exposed m the market-
place , they must get what information they can on this
pomt from other sources and draw inferences from the
attitude of the sellers Buyers, on the other hand, can, and
often do, hold a stock m excess of what they need for
immediate consumption , they can then buy less if prices
are high, and draw on their stock until next market-day,
or they can buy more if prices are low and add to their
stock for the time bemg Thus buyers and sellers ahke
cannot judge merely by what they see, but must constantly
use their judgment to conjecture what othei people really
want

Again, we have treated buyers and sellers as necessarily
different people, but in a large market the same man 1?
often ready to buy or to sell according to the price that he

MARKET EQUILIBRIUM : COMPLICATIONS 197

can secure A merchant may be ready to buy wheat at
three rupees, and to sell it at three rupees two annas , if
the price falls for the moment to three rupees he will buy,
because he has come to the conclusion that the pnee will
very shortly rise, and that he will be able to secure a profit
by selling at three rupees one anna or more On the other
hand, he is ready to sell and reduce his stock when the
price is three rupees two annas if he has reason to t hink
that the price is going to fall In a well-developed market
such merchants are almost alw ays to be found , practically
their whole business consists in forecasting the equilibrium
of the market from the information they can collect as
to supply and demand, and talcing advantage of every
opportunity of selling above, or buying below', what they
think the equilibrium price will be If their forecasts
are correct, that is to say, if they have judged accurately
the price at w Inch supply and demand will be m equilibrium,
they will make a profit on each transaction , if they have
made a mistake they will lose money instead of gaming it
The effect of the presence of such merchants is, as a rule,
to keep the price very near to the true equilibrium price
If the price rises, some merchants at once offer to sell, and
others cease to make offers to buy , that is to say, the
supply of the moment is increased, and the demand of the
moment is reduced , the conditions of the moment are
changed, and the pnee will be reduced again In such a
market then, the price is constantly rismg and falling,
but each rise produces a tendency to fall, and each fall
produces a tendency to rise, so that the price is never
greatly different from that which is justified by the con-
ditions of supply and demand
The fact that merchants are engaged m forecasting the
future leads to further complications, w Inch are commonly

198 AN INTRODUCTION TO ECONOMICS

known as dealings m “futures” If uheat is selling at
about three rupees to-day and a merchant has reason to
think that the price -will bo three rupees four annas next
month, he would obviously bo wise to buy as much -wheat
as he can now, keep it for a month, and then sell it at the
higher pnee And merchants often do tins even when they
have not the money to pay for their purchases , they borrow
the money in one of the various ways that students will
read about when they come to the subject of Credit, or
they agree with the seller that ho shall deliver the wheat
next month and receive payment then Thus if A and B
are two merchants, A in June buys 1000 maunds from B,
agreeing that B is to give him the wheat on 16th July,
and to receive 3000 rupees when he does so Before that
date the price rises to three rupees four annas, and A sells
the 1000 maunds to C for 3260 rupees, though at the tune
he has no wheat in lus possession, but has only B’s promise
to deliver it On 16th July, A receives 3260 rupees from O,
pays 3000 rupees to B and tells him to dehver the wheat
to G A has never had the wheat m his possession, but
he has made a profit of 250 rupees by buying it at a low
price and selling it at a higher O in turn may have sold
it to D for 3400 rupees, and so on
On the other hand, if A thinks the price will fall, he may
sell wheat to B without having any wheat in his possession,
but hopmg to buy it cheaper before the date comes for
delivery, and then the transaction is settled in the same
way We may suppose that A has sold 1000 maunds to
B for 3000 rupees for delivery on 15th July , before that
date he finds himself able to buy 1000 maunds from G for
2800 rupees for the same date, and when the day comes he
tells C to give the wheat to B, receives 3000 rupees from B,
pays 2800 rupees to G and has 200 rupees profit. On the

MARKET EQUILIBRIUM • COMPLICATIONS 199

other hand, A may have made a mistake as to the likelihood
of a fall of prices, and may be unable to find anyone willing
to sell at less than three rupees In that case when the
day comes for delivery to B, he must either break his
contract (which may mean rum to a trader), or he must
buy the wheat to satisfy B’s claim If he can only get it
for 3200 rupees, he must pay that sum, and as he only
receives 3000 rupees from B, he has lost 200 rupees where
he hoped to make a gain.

Transactions of this sort look at first sight like mere
gambling, that is to say, people seem to be selling or buying
simply oil the chance of some future event, and there is
probably a certain amount of gambling in all large markets ,
but a man who starts to deal m a commodity without
knowing the conditions of its supply and demand will very
soon become bankrupt, because he will not be able to
forecast the conditions and the resulting equihbnum-pnce
with the same degree of acouraoy as those merchants who
spend their tune in studying the conditions He will take
the chance of a rise when the conditions should lead him
to expect a fall, and will look for a fall when he should
expect a rise, and in either case ho will lose by the trans-
action, and the more expert merchants will make profits
at his expense, until he either loses all his money or comes
to understand the market-conditions for himself

A modem v ell-developed market, then, consists largely
of a body of merchants, each of whom devotes all his
energies to learning all that he can about the conditions
affecting the supply and demand of the commodity or
commodities m which he deals, and forecasting on the
basis of this knowledge what the equilibrium-price is hkely
to be both m the immediate future (to-day, or to-morrow,
or next week), and at more distant dates. He will buy

200 AN INTRODUCTION TO ECONOMICS

when he thinks he can sell again at a profit, and sell when
he thinks he can buy more cheaply at one time he may
have large stocks on hand, and at others ho may have sold
more than he has , but his success m business depends
on his abihty to forecast the price at which the supply and
demand of the market will be in equilibrium In the nest
chapter we shall see how such markets are connected with
the actual consumers and the actual producers of the
commodities m which they deal.

CHAPTER XXVIII.

RELATION OP PRODUCERS AND CONSUMERS
TO THE MARKET.

A modern wholesale market consists, as we have seen,
largely of a body of merchants engaged m forecasting the
supply and demand for the community m which they deal
In some cases both consumers and producers may be found
taking part in these dealings, but this occurs only when
the quantities which they require or offer are great Thus
where the spinning of cotton yam is done m large factories,
the spinners would take part in the wholesale market for
yam together with the merchants who buy only to sell
again, or buy m order to send the yam to places where it
will be consumed. But the hand-loom weaver obviously
cannot buy the small amount of yam which he needs in
a market which may be hundreds of miles from his home,
and where a large number of bales is sold in a single trans-
action , and m the same way, neither the cultivator nor
the eater of wheat can take part in the wholesale wheat
market These large wholesale markets are therefore
connected with the consumer and the producer by local or
subsidiary markets, and by the dealers or shopkeepers
whose trade is conducted m small quantities, and is spoken
of as retail as distinguished from wholesale. We will
examine the position of the consumer and the producer
of a commodity such as w'heat, the chief wholesale markets

202 AN INTRODUCTION TO ECONOMICS

for which are so closely connected that there is practically
a single market for the whole world.

The man who wants wheat for the food of his family
ordinarily buys it from a shopkeeper, and as a rule, he has
not much to say directly towards settling the price The
shopkeeper settles the retail pnce, and the consumer buys
more or less according os the price is low or high But
this does not mean that the consumers as a body have no
influence on pnce , as a matter of fact, their demand is
one of the most important factors in the market The
shopkeepers of any town know more or less accurately the
demand of that town, that is, the quantity which it will
buy at each pnce, and, as we have seen, they provide for
its consumption more wheat when the price is low and less
wheat when the pnce is high A shopkeeper knows what
his stock of wheat has cost him, and he fixes his retail
price so as to give him as much profit as possible But in
ordinary circumstances he cannot fix the retail pnce very
much above the wholesale pnce, because if he did so he would
feel the competition of the other shopkeepers All of them
want to sell <their wheat, and if one shop asks an excessive
pnce some of its customers will go to other shops and buy
there instead, and the shopkeeper is thus forced to charge
a retail pnce not greatly in excess of the wholesale pnce.

It is obvious that if there are not very many shopkeepers
dealing m wheat, they might all agree to sell at a con-
siderably higher price than the wholesale pnce would
justify Probably this happens at times, and certainly
consumers often think that it happens , but the point is
not important at present The mam function of the shop-
keepers from the point of view of the market is to represent
the consumers’ demand , and they do this m the local
market in the way that has already been explained The

PRODUCERS AND CONSUMERS

203

buyers from larger markets who attend the local market
are quick to notice the changes in the local demand, and
the information they collect is of course communicated to
the merchants for whom they are buying and m this way
the larger w holosale markets are able to watch the changes
m the demand of the country where their agents buy
Thus, the demand of the consumers does in fact enter
largely into the calculations as the result of which wholesale
prices are fixed.

The case of the producer, that is, the cultivator, of
wheat, is somewhat different from that of the consumer
If he brings his wheat to the local market, he is, as we have
seen, not in the best position to get the highest price, and
probably he sells as a rule rather below the pnce that a
better man of business would be able to secure If he is
dissatisfied with the price offered, he can take his wheat back
and wait for another market-day ; but as a rule he is too
busy to waste many days at market, and brmgs his wheat
for sale only when he needs the money, so that he is likely to
take whatever price he can get If, on the other hand, he
makes over his wheat to a dealer in the village, he has not
much chance of learning what the market-price really is,
and the trader is likely to give him something less than the
wheat is worth at the moment Of course, if there were
many traders in or near the village, their competition to
get as much as possible for sale would prevent the price
f allin g very low as they would bid against one another,
and the cultivator would sell to the one who offered most ,
but this condition is rare m Indian villages, where there is
often only one trader, or else a few acting m agreement,
and where many cultivators are in debt to the traders and
so are not their own masters It seems then as if the
traders who buy wheat m the villages could contmue to

204 AN INTRODUCTION TO ECONOMICS

get it at prices very much lover than those that prevail
in the markets , this is, as a matter of fact, true up to a
certain point, and when students come to examine the
history of Indian prices in detail, they will find marked
differences between the recorded market-prices, and what
are spoken of as “ harvest-prices,” that is, the price at
which cultivators make over their crop to the trader at
harvest time The difference appears to be gradually
declining, that is to say, cultivators are gettmg more nearly
the market-price for their produce than they used to do,
but it is still an important consideration for economists
and statisticians when they are investigating the income
which the country derives from agriculture

But though traders can get wheat, and other produce
in the villages at prices substantially lower than those
prevailing m the market, they cannot get wheat or other
produce for nothing , in other words there is a limit of
price below which they cannot go. This limit is a most
important fact m Economics, and we must examine it in
a httle detail

At the beginning of this Book, we saw that a cultivator
who is producing for his own consumption, carries his
production on to the point where the Utility to him of
what he produces is balanced by the Disutility of his
exertions m production When he is producing for the
market, there is still a balance, but it is between the dis-
utility of his exertions and the utility of the money which
he gets for his produce, not the utility of his produce itself
A cultivator who has grown an acre of wheat and thinks
that the price he gets for it does not repay him for his
exertions m production, is helpless so far as that crop is
concerned , he can only take the highest price that is
offered But when the time comes to sow the next crop,

PRODUCERS AND CONSUMERS

205

he will not sow so much wheat as ho did before , he will
perhaps sow none at all, or at any rate he will not sow
that part of his land where the exertion of growing wheat
is greatest Thus if the price that cultivators get for
wheat is too low, in the sense that it does not repay them
for their efforts and exertion, less wheat will be sown in
the following season, whether the cultivator sells the wheat
m the market or sells it to a trader in his village. In either
case, there will be less wheat to sell in the market, that is,
the Supply of wheat will be reduced ; and if the trader
w ants to continue his business on its former scale he must
offer the cultivators a rather higher price to induce them
to sow as large an area as before. Thus, even when a
trader has no competition to face in the village and is sure
of getting for sale all the wheat that is grown in it, he must
make it worth the while of the cultivators to grow' wheat,
and if he offers too low a price, they will not grow it, and he
will be the loser by having less wheat to sell If market-
prices have fallen, traders may not want to have so much
wheat as before, and by keeping the price low m the villages
they can reduce the production of the next crop , while,
if market-prices have been high and they want to have
more wheat to sell, they must offer a higher price m the
villages m order to induce cultivators to sow a larger area
The area sown with a particular crop in a particular season
depends on several considerations, of which the expected
pace is only one, and therefore the statistics of the area
sown cannot be explained solely by the course of prices,
but in the case of crops like wheat, or cotton, or sugarcane,
which are grown mainly in order to sell the produce, it
is usually possible to trace a clear connection between the
extent of the area sown in a district or province and the
prices that have recently prevailed

206 AN INTRODUCTION TO ECONOMICS

We have seen then that the pnce of a commodity in a
wholesale market must he affected by the attitude of both
consumers and producers, though none of them may have
any dealings in that market Changes in. consumers’
demands have constantly to be taken into account , and
on the other hand, the supply is largely determined by the
price that reaches the producer Merchants in the great
markets may not know what is being paid to small pro-
ducers at a distance, hut they spend much trouble in gettmg
the earhest possible information regarding the extent to
which the crop has been sown, 1 since this is the basis of
any accurate estimate of the supply , and if they hear that
the area has been reduced they will at once see that as the
supply is going to be decreased, the equihbnum-price of
the market will have to be raised

A wholesale market, then, is not simple in its working
There may be a large number of sellers, some of them
producers or agents of producers with a stock of the com-
modity that they really want to sell, and other merchants
who are selling without reference to their actual stock (if
they have any), but only with reference to their estimates
of the course of prices , while of the buyers some may be
merchants buying in order to sell again, while others want
the commodity either to consume it m their own factories
or to sell it to consumers throughout the country Buyers
and sellers alike are watching for every item of information
that throws any light on the possibilities of changes in the

1 Students have probably noticed m the newspapers the ‘ fore-
casts ’ which the government publishes from time to time of the
area sown, and the probable yield of crops like wheat, or cotton, or
jute Those forecasts are prepared for the use of the morkete ,
and the officers who prepare them ha\ e to take precautions to ensure
that all merchants have the same opportunity of gettmg them, and
that no merchant shall have a chance of acting on the inf ormation
before it is known to the market generally

PRODUCERS AND CONSUMERS 207

demand or the supply, and are constantly revising their
estimates of what the price will be to-day, or to-morrow,
or next week, or even some months hence , and they are
occupied in ascertaining the views of other merchants and
the prices at which barg ains have been made. The men
who are most successful in forecasting the future course
of prices may make very large fortunes, and those who
are least successful are hkely to become bankrupt, ■while
most of the merchants may make a reasonable income,
which, however, may vary very greatly with the chances
of the market In most countries it is easy for the student
to get to know something of the course of the larger markets,
because the daily newspapers devote a large amount of
space to the subject , students in northern India who
have access to any of the English papers published in
Calcutta or Bombay can in the same way get to know
something of the market in wheat or cotton, or jute, or
tea, but the English papers published up-country and the
great majority of the vernacular papers give very httle
information on the subject

We have said that a modern wholesale market is not
altogether simple in its woiking, but among all the com-
plications, the central fact holds good that it consists of
people engaged in studying the Demand and the Supply
of the commodity in which it deals Each of them wants
to know what quantity of the commodity will be demanded
at each price, and what quantity will be offered for sale at
each price with this information they can conjecture
what the equihbnum-pnce will be, that is, the price at
which the quantity supplied will be equal to the quantity
demanded, and their livelihood depends on the accuracy
of their conjectures

CHAPTER XXIX.

NORMAL EQUILIBRIUM

We have now seen that the retail prices of commodities,
that is, the prices with winch ordinary consumers are
directly concerned, depend on the wholesale prices arrived
at m the larger markets , and we have seen that these
wholesale prices fluctuate from day to day according to
the information obtamed and the views formed by the
persons who deal m the market But while prices, both
wholesale and retail, do in fact fluctuate, we must recognise
from our experience that the ordinary consumer has a
more or less definite standard of price for each of the
commodities he is accustomed to buy , when the price
is above his standard he says the price is high, and vlien
it is below the standard he says it is low And it is not only
the consumer who thinks of a standard of price , the
market also has a standard, which is usually spoken of as
‘ Normal Price ’ The two expressions * standard price ’
and 1 normal price ’ mean the same thing when u e set
up in our minds a standard of price, we do not mean that
the price of the moment should always he exactly the
standard we have set up, but we mean that we regard the
divergences from that standard as exceptional, and wheD
the price has diverged we expect to see it return to the
standard In the same way we speak of the price of the

normal Equilibrium 209

moment as abnormally low or abnormal^ high, me anin g
that it is different from the standard or normal price
Thus, in some parts of northern India ordinary people
think of sixteen sers as the standard or normal price of
wheat , w hen less than this quantity can be got for a rupee,
they consider that wheat is dear, or that the price is abnor-
mally high, while when they can get a larger quantity,
they say that v. heat is cheap, 01 that the price is abnoimally
low

The idea of a Normal Price is of great importance, and
we hare to see how it is deter min ed and how it is related
to the market price But it is well to say at once that the
standard or normal price, whatever it may be, does not
remain the same for ever, but changes from time to tune.
Thus, in some of the places where the normal pnce of wheat
is sixteen sers, it was probably twenty sers or even more m
the days before the large trade in wheat had developed ,
and perhaps old people could still be found who regard
tw enty sers as the normal price and sixteen sers as abnor-
mally high They still think of the standard that prevailed
in their youth, and have not noticed that the standard has
changed , but all ordinary people in these places would
say without any hesitation that at the present tame twenty
sers is an abnormally low pnce. A normal pnce then lasts
for a long tune compared to a market price, which may
change from hour to hour ; but it is itself hable to change,
though more slowly and gradually

To see what this standard or normal price is, we must
go back to what we said in the last chapter about the way
in which producers balance the utility of their produce,
or of the money it bnngs, against the dis-utihty of producing
it. In order to examine this subject more closely, it is-
convement to take an industry that is not, hke wheat-

o

210 AN INTRODUCTION TO ECONOMICS

growing, dependent on the seasons of the year for an
increase or decrease in production A wheat-grower who
wants to change the amount of his production must decide
between September and November of each year , after
November he can sow no more wheat for a year We will
take instead the production of coarse country cloth, which
hand-loom weavers can work at throughout the year, and
we will suppose that the price of this cloth in a market
has been such that the weavers whose cloth is sold m it
just make a living after paying for the yam and other
materials they use At a later stage students will have to
pay close attention to the exact meaning of this expression
‘ just make a living * for the present, we may explam
it provisionally as meaning that they get enough food and
clothes for their families, and can spend something on what
we have called conventional necessaries, but that they are
not able to save up monoy or increase then expenditure
Now suppose that the market-price of cloth falls, and the
weavers find that the pnee does not now enable them to
make a hving So far as they have cloth already made,
they can do nothing but accept the pnee that is offered,
and at first they will probably go on produemg as before,
and either cut down their expenditure on food or get into
debt But if the puce contmues low, they cannot go on
m this way they will find that they can borrow no more
money, and they wall begin to suffer from insufficient
feeding They do not understand the process by which
prices are fixed, but they do understand that they are not
making a living by w r eavmg, and they will do something
else, instead of, or in addition to, their regular industry.
All the weavers will not act m the same w r ay probably
some of them, w hose looms are nearly worn out, will leave
them idle and work as day-labourers in the fields or in the

NORMAL EQUILIBRIUM 211

town • some of the younger men will go away and look for
work m cities most will probably continue to mako some
cloth, but many of them will loavo their looms at times
when labourers aro wanted and wages are high, going
to work, for instance, in the harvest-fields. The result
will obviously be that less cloth is produced, because fewer
weavers aro working, and some of them aro only working
for part of thoir time ; and if less cloth is produced, there
will be Iho less to offer for sale m the market, or in other
words, tho supply will bo reduced But the reduction of
the supply is ns wo havo seen 311st what is w-anted in older
to Taise tho market-price, and in ordinary circumstances
this effect must follow It is obviously not possible that
tho prico can remain for long below the point at which the
weavers can mako a living ; and if it falls below that point
for a time the supply of doth will fall off and the price
will bo raised again towards that point

Now lot us take the opposite case and suppose that the
pneo rises so that weavers oan mako more than a lmng,
that is to say, can save up money or increase their expendi-
ture Hero one of two results may follow : if tho weavers
are anxious to save up money or mcreoso their expenditure,
they will increase their production ; but if they aro not
anxious on these points, and value leisure more than money
they will decrease their production. Wo must examine
theso cases separately

Tho first case is that which would usually follow m
western countries, and economists writing for thoso countries
are probably justified in passing over the possibility of
tho second case Whore men want to make money and
improve them way of living, they are quick to seize such
a chance tho weavers w'oukl woik for longer hours, they
would take more help from their families, and some whose

212 AN INTRODUCTION TO ECONOMICS

looms wore worn out would buy new and efficient ones
Thus the production of cloth would bo increased, and this
would mean an increase m the supply in the market, and
consequently a fall of price

In India and somo other countries it is not safe to
assume that this result must certainly follow Somo
classes of the people value leisure — or we may say idleness
— more than the possibility of saving money and increasing
expenditure , and if these people find that they are making
more than a living, they may do less work, that is to say,
they may decrease their production instead of increasing
it This would mean a decreased supply m the market,
and this would mean a further rise m price instead of a
fall A full analysis of the course of the market in this
case cannot be made effectively without a more complete
knowledge of the science than elementary students possess ;
and for the present we leave this case aside as exceptional.
We ask students then to assume provisionally for the
purposes of their study that Indian producers as a whole
will try to make money when they have a chance , but
we also ask them to remember that if a particular class of
producers does not want to make money and reduces its
production when prices rise, then the adjustment of price
will follow different hues from those that are indicated m
this assumption We do not ask students to assume that
when the pnee of a commodity rises every individual
artisan who makes it will at once work harder and increase
his production , the assumption is that the production will
increase as a whole Some producers will probably prefer
rest, and produce less , some will take httle notice of the
change, and produce the same quantity as before, while
others will work harder and produce more , and the
assumption is that the extra produce of those last named will

NORMAL EQUILIBRIUM 213

more than counterbalance the dccreaso m produco which
results from somo producers doing less work
On tins assumption, which is probably — as a rule, but
not universally — correct m the present conditions m
noitlicra India, a nso m the price paid to producers mil
lead to an increased production, and the resulting increase
m supply will lowor the market pneo Wo thus see that m
the second, or artisan, stage of production, while conditions
remain (he same, there is m fact a standard or normal
pneo, as is popularly supposed , and that when the market-
price diverges in cither direction from that standard, the
action of producers will tend to bring it back. If the price
falls, production will be reduced, and if the pneo rises
production will bo increased. The standard of pnee will
be the prico at which the ordinary artisans can just make
a livmg, after paying for their materials and for the cost
of keeping their tools and apphances in order.

The words, while conditions remain the same, printed in
italics in the last paragraph, are of tho utmost impol lance
If tho proviso were omitted, it would appear that the
standard of prico could never change, and this would be
entirely untruo Conditions do m fact change, and then
the standard or normal price changes, as we shall see later on,
but first we must sco if our general conclusion holds for the
factory -stage of production os well ns for the artisan-stage
Let us tako tho case of a market supplied with sugai fiom
seveinl factories which buy up tbo crude country sugar
known as gur and prepare white sugar from it , and to
simplify tho argument, let us suppose that the profits are
not affected by the sale of the molasses ( shira ) obtained
in tho process of manufacture We obviously cannot
speak as wo could of tho artisan, of such a factory just
making a living , but we shall find that in this case the

214 AN INTRODUCTION TO ECONOMICS

standard of price is set by what we will call the Expenses
of Production, and that this standard corresponds very
closely with the standard which we found to exist in the
case of artisan-production The term Expenses of Pro-
duction is used to express the total of several items of
expenditure , its exact significance will require careful
study at a later stage of the course, but for the present
we may say in general terms that it includes (1) the price
of materials, fuel and stores used in the process of manu-
facture , (2) the cost of maintaining and replacing the
buildings and machinery , (3) the salaries and wages of
all the employees and workmen , and (4) the owner’s profit
Detailed accounts of expenditure under the first three
heads are kept m all factories, and the expense of producing,
say, a maund of sugar can be calculated by taking the
expenditure over a period of tune and dividing it by the
number of maunds produced in that time , to this figure
something has to be added for the owner’s profit The
nature of this last item will require examination later on'
when we are considering the subject of Distribution, but
we can see at once that a man will not work such a factory
for nothing , he puts his work and his capital into it
because he expects to earn an income from it, and the profit
represents this income

Let us suppose that the accounts of one of these sugar
factories, which has no special advantages and no special
drawbacks, show that the money paid out comes to eight
rupees per maund of sugar produced, and that the owner
adds one rupee as a fair profit for himself , the expenses
of production are then rune rupees per maund By * fair
profit ’ ne mean a profit that just about satisfies the owners
of such factories , when they are making this amount they
are not sorry that their money was not invested m some

NORMAL EQUILIBRIUM 215

other industry, and on the other hand they are not anxious
t-o increase their investments in sugar-making Then, if
the market-price of sugar is nine rupees, or equal to the
expenses of production calculated in this way, factory
owners will be just about satisfied. If the markot-pnee
falls to eight rupees, thero will bo nothing left for profit,
and owners will at once reduce the amount they offer for
sale, that is, they will reduce the supply in the market,
in the expectation that this reduction m supply will cause
the market-price to rise again, up to the pomt where sales
will gi\ o them the profit that they consider fair. In many
cases, where the fall in price is thought to bo very temporary,
owners may not alter the working of the factory, but merely
put more of tho sugar made into then stores, and wait to
sell it later m this case they aro acting just like dealers
in the market But they may also roduce tho amount
of sugar produced, and this can be done in various ways
without actually closing the factory , they may work for
a shorter time each day, or they may stop working some
of the machines, or they may merely avoid hurrying , it
is part of the business of a factory-manager to know how
to change the rate of production when tho need arises
Thus, whon tho price falls below tho expenses of pro-
duction, owners of factories will take measures chat are
likely to result in raising the price again Their action
is conscious and deliberate, while the aotion of tho weavers
whom wo considered a few pages back is instinctive , but
the result is m both coses the same, a reduction m the
supply which causes the market-price to rise towards
the pomt from which it has fallen Now, if we suppose the
market-price of sugar rises to ten rupees, we see that the
owner will get tw’O rupees profit on each maund instead of
the one rupee which just about satisfies him We need

216 AN INTRODUCTION TO ECONOMICS

not think m tins case, as wo had to think m the case of
artisans, that owners generally may decrease production
They work their factories for profit, and when they see
that the price gives them a high profit per maund, they
will sell as many maunds as possible m order to obtain the
largest possible profit They will endeavour to sell any
stock of sugar they may have on their hands, and they w ill
increase production, possibly by working longer hours,
and m any case by hurrying up work as much as possible
Thus, when the price rises above the expenses of production,
the supply m the market will be mcreased, and the mcreased
supply will bring prices down again

In the stage then of factory-production, we see that
there is a standard or normal price, and that when the
market-price diverges from this, producers are induced
to alter the supply m such a way that the divergence is
counteracted The position is thus precisely the same as
in the stage of artisan-production, though the complex
working of a factory compels us to speak of the expenses
of production instead of the simpler expression that was
applicable to the artisan But if we consider the artisan’s
income (after paying for materials and for the maintenance
of his appliances) to consist partly of the wages he has
earned by working and partly of the profit resulting from
the management of his own business, then we may correctly
say that in his case also the standard of price is the expenses
of production , and we may sum up the foregoing discussion
as follows

In all cases where the production of a commodity is not
subject to a monopoly, the Expenses of its Production
indicate the standard or normal price, which remains the
same so long as the conditions of consumption and produc-
tion are unaltered The market-price must be expected to

KOKMAL EQUILIBRIUM 217

fluctuate, hut whenever it di\erges from tho normal pnco,
cao<c? arc bronchi into operation to reduce the dn eigencc
by alluring the supply offered m the market The market-
priee is thus nlwaxs tending to return to the normal.

There is a possible exception to this general rule m the
cn*-e of arli'-m-produclion if the majority of tho artisans
prefer lei , -nn> to money. Tins case has somo interest
both m theory and in practice, but its discussion must ho
postponed.

Where production is controlled by a monopoly the
position is materially different, but its discussion must
be left for study at a later period of tho student’s course

In the next chapter wo have to say something about tho
changes in the standard or normal pnco which result from
changes m the conditions of production or consumption ;
but before wo turn to this a little may bo said on a question
of wording, which might otherwise bo a cause of difficulty.
Earlier writers were accustomed to use tho term ‘ Cost of
Production ’ in the sense which wo have expressed by
* Expenses of Production ’ ; and somo of them used the
word ‘ natural ’ to express what wo mean by standard or
normal Students will thus find somo writers saying that
the Natural Prico of a commodity is equal to the cost of
its production Tho word Natural has now been generally
given up because it has soveral meanings, and tho word
Normal is generally used in its placo Tho expression
Cost of Production was as a matter of fact used in two
senses ; sometimes it meant what wo have called tho
Disutility invohod in Production, and sometimes thomonoy
that must bo paid to balance this Dis-utility The two senses
have been occasionally confused, and it is convenient to
avoid the risk of confusion by using the term Expenses
of Production to signify tho cost measured in money.

CHAPTER XXX.

CHANGES IN EXPENSES OF PRODUCTION.

We have seen, in the last chapter that the normal price of
a commodity is equal to the expenses of its production so
long as the conditions of production and consumption remain
unchanged We have now to see exactly what this proviso
means, and how far it is true m the world in -which we
live

The proviso does not imply either that all the items of
expenses remain exactly the same during the penod under
consideration, or that they are the same m all factories
producmg the same commodity The managers of a factory
have two mam objects m view one is, as we have seen,
to sell the produce at the highest possible price, and the
other is to keep the expenses of production as low as
possible A competent manager is thus constantly on the
look-out for any means of reducing the expenses , he com-
pares the efficiency of different classes of labourers he
plans the various operations so as to require as few labourers
as possible, and he sees whether any particular piece of
work can be done more cheaply by labourers or by machine
At the same time he has to t hin k of buying his materials
as cheaply as possible, of reducing the cost of carrying them,
of getting the best work out of his staff, of saving office
expenses by reducmg the writing and account work, and

CHANGES m EXPENSES OP PRODUCTION 219

generally he has to watch every branch of the work so as
to see where any saving is possible And managers differ
very greatly in competence, so that it is most improbable
that many factories will be found to have exactly the same
expenses of production in detail.

When, therefore, wo speak of the expenses of production
of a commodity, we must not think that every maund of
it costs exactly the same amount of money to produce in
some factories a maund costs rather less, and in other
factories it costs rather more, and again the expense may
vary from tune to tune, even in the same factory But at
any given tune it is possible to recognise a standard of
expenses ; we can say, for example, that in a given season
the expense of produemg a maund of sugar for a certain
market has been nine rupees, even though some factories
have produced at eight rupees and others at nine rupees
eight annas The former class has made more than the
usual profit, and the latter class has made less ; but the
average profit of the whole industry has been about the
same as if all factories had worked at the same cost It is
then the standard expenses in the industry that set the
standard of price, and not the expenses of any particular
factory.

We must recognise clearly that this standard of expenses
does, as a matter of fact, change with changes in the con-
ditions of production and consumption It is possible to
imagine a state of things where the population is stationary .
where the people go on consuming the same quantities of
the same things ; and where the methods of production
do not change Economists sometimes assume for purposes
of arg um ent the existence of such a Stationary State, and
it is true that, if such a state existed, the standard or
normal price of commodities would remain unchanged.

220 AN INTRODUCTION TO ECONOMICS

It is not possible to point to any period m the economic
history of India where such a Stationary State actually
existed, and that history shows that changes tend to
increase m rapidity, so that it is very unlikely that the
country is on the way to such a state , but we can pick out
a few possible cases which will serve as illustrations of what
a Stationary State would mean if it over came into
existence

Take the case of the potter m a self-supporting village,
such as we considered m Chapter XHL While the popula-
tion of the village remains about the same, and the habits
of the people are unchanged, the demand for earthen vessels
in the village will vary very little from year to year The
potter will go on making about the same number of the
same sort of vessels, and receiving the same amount of
gram m exchange for them There will be no market and
no bargaining as to the price to be paid, because the whole
business has become customary , the pottei does not
change his methods of work , he gets enough to enable
him to live in the way to which he is accustomed, and the
price paid for each vessel is the normal price so far as that
village is concerned Some of the other village artisans
offer similar examples, and further examples may perhaps
be found even among the artisans of small and unpro-
gressive towns So long as the conditions of demand and
supply are unchanged, the normal price of the commodity
remains the same, and when it has become customary the
price actually paid m each case is equal to the normal
price

If, now, the self-supporting village comes into relations
with a town, and buying and se llin g begin, the potter is
likely to be affected In the first place, the town may want
earthen vessels as well as the village, and the potter may

CHANGES IN EXPENSES OE PRODUCTION 221

not have enough to supply overy one. He would naturally
sell u hat he has to Ins old customers in the village , but
some of tho townspeople will offer lum a higher price, and
he Mill take this from them, unless the villagers also are
Milling to pay a higher price And so the increase in the
demand breaks up u hat has become the old village custom,
and the potter can get a lugher price than that to which he
was accustomed On tho other hand, the villagers may
take to using brass vessels when they find that they can
buy these in the town, and the demand for the potter’s
products may fall off in consequence. Or a potter may
come and settle m the town, bringing a new kind of wheel
and other appliances with which he can make better vessels,
and make them in larger quantities than the village potter ,
he may sell to tho villagers as well as the townspeople, and
the village potter may find that he can no longer ask the
old price, and may have to reduce it, and either work
harder, or live worse, or copy the town potter’s apphances
These imaginary illustrations are intended to put in
their simplest shape the land of things that happen m the
case of ordinary artisan industries, and that happen still
more frequently in tho larger industries carried on in the
factory stage For it is a matter of experience that pro-
cesses and methods of production change, and that tastes
and habits of consumers change also It is usual to say
that India changes very slowly m such matters, and this is
true if the comparison is made with some western coun-
tries but tho changes occur all the same, and at the
present time the speed at which they occur is certainly
increasing And when the changes occur, they affect the
expenses of produemg a commodity, and consequently
alter its standard or normal price , so that though the
normal price may be the same this year as last year, it is

222 AN INTRODUCTION TO ECONOMICS

unlike ly to be the same this year as it was ten years
ago

Students must look to the large treatises on Economics
for an analysis of the working of the various causes that
may change the price at whioh production and consumption
come into equilibrium , here we can only give a few
typical examples It is fairly well known that the money-
wages of agricultural labourers have been rising m recent
years in various parts of India The rise has directly
affected the busmess of all cultivators, who have to pay
higher wages than before for the same work , but it is felt
most seriously in the case of those crops which require
most labour The cotton crop is one of these , its cultiva-
tion is not specially expensive, but many labourers have to
be hired to go over the field from time to time and pick the
cotton as it ripens , and consequently the money paid m
wages represents a relatively large proportion of the ex-
penses of producing the raw cotton The rise m the wages
of labourers has therefore increased the expenses of pro-
ducing cotton more than the expenses of producing some
other crops such as food-grains and consequently large
numbers of cultivators, who m the past were doubtful
whether to use their land for cotton or for food-grams, are
now more inclined to grow food-grains, because they cost
less in labour This would mean a reduction m the area
under cotton , and m order to get the amount of cotton
they require, gmners have to offer a rather higher pnce
than they would otherwise have done, m order to make it
■north the cultivators’ while to grow the crop The actual
price may vary from day to day or week to week, but the
normal price (to which the actual price tends to return)
will be higher than it would have been if labourers’ wages
had not risen

CHANGES IN EXPENSES OE PRODUCTION 223

But this is only the beginning The cotton-gmners work
in the localities -where the cotton is grown, and hir e many
of their workmen from among the agricultural labourers ,
and they find that they have to pay higher wages in order
to get the labourers they need So the expenses of producing
cleaned cotton are raised in two ways m consequence of
the rise m wages ; and its normal price must rise if spinners
are to get the quantity of cleaned cotton that they need
But cotton-spuiners, too, find that they have to pay higher
wages than they used, and m the same way the normal
price of cotton-yam must rise, so that it may cover the
extra expenses of (1) the cultivators, (2) the gmners, and
(3) the spinners , and we might carry the illustration
further to show that the normal pnce of clothes must rise
to cover, not only the extra cost of yam, but also the higher
wages paid to weavers, and to dyers and tailors

If then there -were no other changes to take mto account,
we should be able to trace the effect on the normal pnce
of clothes of a nse in the wages of the vanous classes of
labourers and workmen employed m their production
But it is very seldom, indeed, that the world stands still
long enough for us to watch the effect of a single cause like
this, and many other changes have been taking place at
the same time Thus, the labourers whose wages have
risen can now spend more money on clothes, and, since
large numbers of them are still insufficiently clothed, this
may mean a large increase in the demand for cotton clothes ,
and as the demand has risen, the equihbnum-pnce must be
different from what it was On the other hand, railways
have been built and have made it possible to bring cleaned
cotton to the spinning-mills from large areas where the
cost of carnage w as formerly excessive . this means a
large increase in the supply of cleaned cotton, and this

224 AN INTRODUCTION TO ECONOMICS

would tend to reduce the price which spinners must pay,
and consequently reduce the expenses of producing cotton-
yam, a change which will tend to reduce the normal price
of cotton-clothes And at the same time, probably better
spinning machinery has been mtroduced, the price of coal
for fuel has probably changed, and many other alterations
m the conditions, both of production and consumption,
have probably taken place While, therefore, we recognise
that the normal price of cotton clothes is equal to the
expenses of producing them, we must also recognise that
these expenses are themselves liable to change, and that
thus the normal price is not likely to remain fixed for any
considerable time

Let us take another example from the trade m kerosene-
oil The use of this oil in northern India is comparatively
recent formerly light was obtained universally, as it still
is in many villages, by burning one of the oils produced
from seeds grown locally When kerosene oil first came
into use, it vas sent up country packed m tms, and the
tins placed in boxes, just as the better qualities of oil are
still transported This method of packing is expensive,
and the cost of carrying the oil so packed by rail is con-
siderable , it will bo remembered that production includes
the transport of commodities to the place where they are
wanted for consumption, and consequently these expenses
are mcluded in the expenses of production when the oil
is sold up-country At first, therefore, the price was high,
and the oil was used by only a few people But it satisfied
a want, and its use increased until it became worth the
producers’ while to introduce new apphances that would
reduce very largely the expenses of transportation All
readers must have seen some of the oil-depots which have
been set up along the railways during the last few years .

CHANGES IN EXPENSES OF PRODUCTION 225

tho oil is pumped into tanks placed on trucks, and these
trucks are brought up-country by tram, and the oil pumped
from them into tho tanks at the depots Thus, almost all
tho expenses of packing are saved, and the expenses of
freight are greatly reduced consequently the expenses of
producing the oil in tho various towns along the railways
have been greatly reduced, and tho oil can be sold much
more cheaply than was formerly the case
Hero again we have only noticed a single cause operating
to change the expenses of production The recent history
of tho oil-trade in India has to deal with many other causes,
some tending to laise and others to lower the normal price,
but they are rather too complicated to go mto hero

As we have said above, wo do not intend to attempt an
analysis of the causes that may affect the normal prices of
commodities The subject is difficult, and it is better that
students should first pass on to an elementary study of the
subject of Distribution , but a few words may be said here
to indicate one of the mam causes of difficulty, namely the
element of time If we confine our attention to a particular
day or week, we can, in tho case of most commodities, make
a fairly close calculation of tho expenses of production,
that is of tho normal price, as it existed on that day or m
that week But when we look at a longer period, the cal-
culation becomes more and more difficult, because changes
have taken place gradually during it, and the normal price
at its end is not tho same as the normal price at the begin-
ning. Few economic causes produce their full effect im-
mediately, and some of them may operate gradually over
a period of many years , so that when we consider the
effects that will result from a particular cause, we have to
direct our attention especially to the period of tune that is
required for the effects to be produced. Students will not

p

226 AN INTRODUCTION TO ECONOMICS

feel the resulting difficulty until they attempt to master a
full analysis of the problem of equilibrium, such as will be
found in the larger test-books , but it is well for them to
know that this question of time constitutes one of the chief
difficulties that he before them.

CHAPTER XXXI

CONCLUSIONS

At tho beginning of this Book we stated the central problem
of the science of Economics in the following terms

How does it come about that a particular quantity
of any commodity is produced and sold at a particular
price 1 In what way is the quantity determined, and
how is the price fixed 7

The answer at which we have amved may be set out as
follows .

(1) In any market where a commodity is bought
and sold, the quantity demanded tends to decrease as
the price rises, and to increase as the price falls

(2) On the other hand, the quantity offered for sale
(that is, the supply) tends to mcrease as the pnee nses,
and to decrease as the price falls

(3) The effect of the bargaining that takes place in
the market is to settle the equihbnum-pnce, that is to
say the price at which the amount demanded is equal
to tho amount supphed.

(4) The market-price so settled may vary from day
to day, but so long as the conditions of production and
consumption are unaltered it tends, in the case of
ordinary commodities, to be equal to the expenses of
production, because when it diverges from that amount

228 AN INTRODUCTION TO ECONOMICS

»

causes come into operation to bring the market-price
back to it The standard or normal price is thus equal
to the expenses of production for the time being
(We indicated that this conclusion may not apply
in. cases where the production of a commodity is m the
hands of a Monopoly, but left that subject for study at
a later stage Wo also indicated a possible exception
to the rule m the case of some Indian artisans, but the
study of that exception also was postponed )

(6) The conditions of production and consumption
are, as a matter of fact, constantly changing , these
changes result in changes m the expenses of production,
and, therefore, the normal price is itself liable to change •
The further analysis of changes in normal prices was
deferred for later study, but attention was directed to
the difficulty caused by the element of time
It will be seen that no simple answer can be given to the
question "with which we started Life is complicated, and
as time goes on its complications tend to mcrease , and a
science hke Economics, which deals with a large part of
life, cannot be made entirely simple, because at any moment
numerous causes are m operation, some working m one
direction and some working m another We can, as a rule,
observe only the single result that follows from these
numerous causes, and, m order to understand that result,
we have to trace out the working of the various causes, one
by one, and see how far each has contributed to the result
Ordinary people are not inclined to take all this trouble,
and are apt to be satisfied when they have found a single
cause that seems hkely to have contributed to the observed
result For instance, we observe that at the present time
the prices of food-grams m India arc higher than they used
to be, and the ordinary man is inclined to pick out some

CONCLUSIONS

229

single cause, which he knows to bo m operation, and
attribute the whole result to that cause Thus we may
find newspaper-writers confidently attnbutmg the rise in
prices to tho w cathcr, or to the construction of railways, or
to tho development of the export trade, or to any one of a
dozen or more processes which are known to be going on,
and which seem at first sight to explain the whole thin g
But life is not so simple as all that, and the person who
really w ants to understand any economic result has to study
all the causes that have in any way contributed to it, or
that seem likely to bo connected wnth it m any way, and to
determine so far as he can the share that each has taken in
produemg the result And smee many processes which
look like causes are themselves the result of other causes,
he has to study the causes of these causes m the same way
a rise in wages may be one of the causes of a rise in pnee,
but tho nse in wages is itself the result of other causes (as
we shall see in tho next Book), and each of these has to be
studied before the final result is fully understood
Now, our minds are not able to study a large number of
causes at once we know this by experience The econo-
mist has to follow the same course as students of other
sciences, and study one cause at a time He assumes for
the purposes of study that only a single cause is at work,
and he studies what the result would be if that cause were
to work without interference from other causes , he then
studies the othor causes, one by one, in the same way,
seeing which causes work in the same direction as the
cause first studied, and which causes work m another direc-
tion, and so tend to counteract it , and at last he arrives at
a conclusion, which may approach more or less nearly to
the actual truth, as to the explanation of the result which
has been the subject of his study He is then in a position

230 AN INTRODUCTION TO ECONOMICS

to forecast, with more or less accuracy, how the result will
be affected by changes in the strength of one or other of
the causes at work

The argument in the present Book may be taken as an
example of this method of study We began by ex aminin g
what happens in a market with a variety of restrictions
that are not often found in actual life, and we saw how m
those conditions an equilibnum-pnce would be determined
by the operations of the market We then extended the
study by seeing what would happen if some of these restric-
tions were removed, and so got gradually nearer the truth
Then we turned to a new set of causes, the Btudy of which
showed us that there is a standard or normal price to which
the market-price tends to return and then we turned to
still another set of causes showing that this normal price is
itself subject to change We are not yet at the conclusion
of the investigation we have left for the future, for one
thing, the study of the effects of Monopolies, a study of
great practical importance, and we have also postponed
the detailed examination of the causes that lead to altera-
tions in normal prices The answer, then, that we have
given to the question under investigation is not yet com-
plete, but is only an approximation to the truth
When economists are engaged on an investigation of this
kind, it is their duty to make quite plam what they are
doing Thus, when they are studying a single cause, and
assuming that no other causes are at work, they use, or
should use, the phrase, ‘ Other things bemg equal,’ or
some other words which make plain to a reader, if he is
careful, just what is bemg done But some writers and
especially some of the earlier writers, such as Ricardo, have
not always been careful to do this, and have made certain
assumptions which'they have not stated in words. Students

CONCLUSIONS

231

have, therefore, to be on tlie look-out for such assumptions .
thoy must know just -what tlie -writer 13 assuming for the
moment ; and -when they are sufficiently advanced to read
some of the classical writers on the subject, they must be
prepared to find that the assumptions are not clearly
staled, and that they must find out for themselves exactly
what is assumed.

One assumption is so important in connection with
normal prices that it is well to mention it agam, although
it has been specified in Chapter IV. ; we are assuming
throughout that the purchasmg power of money remains
unchanged. So far as fluctuations in market-prices are
concerned, this assumption is in accordance with the facts,
since changes in purchasmg power do not occur so rapidly
as to affect the argument materially. But when we are
considering changes in the normal price, we have usually
to examine a period of such duration that the purchasmg
power of money may have altered materially , and if we
overlook such an alteration we may be seriously misled.
For the present, it is enough for students to remember that
the assumption has been made , when they haVe advanced
further in their course they will find that the necessity of
making the assumption can be avoided by considering
normal values instead of normal prices, and that this course
is commonly adopted in the larger works on Economics

We have described the subject-matter of this Book as
the central problem of the science. The reason for saymg
this is found m the fact that the equilibrium between supply
and demand, which we have so far studied only m connection
with co mm odities, will bo found to exist also m relation to
the various factors of production, and to explain how the
remuneration of each factor is determined in other words,
we shall find that the wages of labourers, the interest paid

232 AN INTRODUCTION TO ECONOMICS

for capital, the earnings of employees and business-men, and
the rent of land are all very closely connected with the
supply and demand for these different factors The next-
Book will deal with these questions, winch are grouped
together under the name Distribution of Wealth
We are not yet, however, m a position to give a complete
theory of Distribution Such a theory must depend on a
more exhaustive study of the equilibrium of supply and
demand than we have attempted, and all that can be done
with our present knowledge is to indicate the processes by
which the various factors of production have come to
resemble commodities m many important aspects, and also
the mam features of difference that exist between the two
classes A preliminary account of this kind will not enable
students to understand fully the causes that determine
the rate of wages or rent or interest, but it will enable them
to appreciate the objects and the importance of the fuller
study of supply and demand that lies before them.

BOOK V.
DISTRIBUTION.

CHATTER XXXII.

INTRODUCTORY.

Wr have seen that certain Factors have to be employed
m order to produce Wealth ; and mo have non to examine
the nay m which the wealth when produced is distributed
among the people w ho have furnished the different factors
Tins section of tlio science is spoken of as Distribution
It is possible to imagine cases m which the question of
distribution docs not arise, though it is very hard to find
such cases m actual existence If we supposo that a man
lives by himrelf on land to which no one olso has a claim,
and produces without assistance all the wealth which ho
consumes, then no one clso could make any claim to share
in that wealth on the ground that he has helped to produce
it ; the man who produces keeps the whole produce. But
such cases are very rare ; in all the stages of production
which wo can observe wo find that the necessary factors
are provided by moro persons than one, and that the
persons who provido the different factors receive a share
m the produco to recompense them for tho part which
they have taken m production Thus in the self-supporting
stage of production tho cultivator, who conducts the
business, also supplies most or all of the capital and a
large part of tho labour ; but tho land is usually provided
by the land -holder, who claims rent for its use, the

236 AN INTRODUCTION TO ECONOMICS

labourers and artisans who are employed claim wages m
return foT the labour they contribute , and if the cultivator
has borrowed capital, the lender claims interest for its use
S imilar ly m the artisan-stage, the artisan who conducts
the business also provides some of the labour and capital
employed , but he has to pay rent if he has hired a house
or land, he has to pay wages if he employs labourers, and
he has to pay interest on the capital ho has borrowed
And m the factory-stage, the owners of the factory have
to pay rent, wages, and interest m precisely the same way.
The reason why such payments have to be made is simply
that people as a rule will not do things for nothing ordinary
men who possess land or capital want some remuneration
for their use, just as labourers want wages in return for
their work , and the questions with which we are now
concerned relate to the amount of the remuneration that
is paid to the persons who provide the various factors

When a commodity has been produced, the pnee received
for it has to meet claims on account of

(1) Interest.

(2) Rent

(3) Wages

(4) Earnings of Management

The problems of Distribution are concerned with the
manner in which the amount of these claims is determined ,
but there are other claims also on the price received, and
we must notice briefly

(6) Replacing the capital consumed in the production

(6) Taxation

The necessity of replacing the capital consumed is obvious
so far as circulating capital is concerned When a weaver
sells a piece of cloth, the pnee has to cover the cost of the
yam which he has used in making it the cultivator has

INTRODUCTORY

237

to replace the gram -which he has used for seed ; a sugar-
factory has to make good what it has paid for materials
and fuel, as well as for wages But the consumption of
fixed capital has also to bo allow ed for Buildings, ma chin es

or tools do not last for ever, but wear out gradually, and
a time comes v hen they have to be replaced , if a producer
docs not provide for their replacement out of his produce,
but distributes all of it under other heads, a time must
come when his production is brought to a standstill because
his fixed capital is used up In all well-conducted enter-
prises, therefore, a suitable share of the produce is set
aside periodically to make good the deterioration of the
fixed capital; thus when the accounts of a factory are
made up for the year or half-year, a sum is set aside under
the name of depreciation before the earnings are calculated
The need for such a provision is indeed frequently over-
looked by producers in a small way of business, and this
omission is a common cause of their financial rum If
w e take the case of a cultivator who has bought a pair of
bullocks for fifty rupees, and who counts on them to do
lus work for ten years, it is easy to see that he should set
aside five rupees 1 out of his produce each year, so that in

1 Strictly speaking, less than five rupees would suffice if ho could
lm cat tho money and got interest on it until it is needed , ho would
ha\o to put asido annually such a sum as would amount to fifty
rupees at tho end of ton years But where a cultivator has not
access to a bank, ns is still generally tho case in India, it ib not easy
for him to put small sums out at interest in this way

On tho other hand, ho would be wise to put something extra aside
by way of Insurance against tho risk that his cattle may die before
the ten years havo expired , if they die after six years, ho will only
have thirty rupeos available to replace them Most forms of enter-
prise provide m one way or another for insurance against certain
risks of this kind, and the subject is discussed at length in tho
larger treatises on Economics , but we are leaving it out of account
for the present in order to simplify as for as possible a problem wluch
is in any case complicated

238 AN INTRODUCTION TO ECONOMICS

ten years’ time he may have the money to buy another
pair , but as a matter of fact cultivators very often fail
to provide the money for replacing their capital, and when
their cattle die they have either to borrow fresh capital
to replace them, or if they cannot do this they have to
leave their bolding, which is their means of livelihood

Thus the wealth produced has first of all to make good
the capital consumed m its production, whether the capital
is circulating, that is, consumed m a single operation, or
whether it is fixed and wears out gradually The balance
left after doing this is the amount available for distribution.

The other item, taxation, represents the amount that
has to be paid to government or to local authorities such
as municipalities This amount is determined directly by
legislation and not by economic causes , the economic
effects of taxation may be very important, and these are
usually considered m a special department of the science,
but for our present purpose it is enough to note that part
of the wealth produced may have to be paid away in the
form of taxes or rates, and is not available for distribution
among the factors of production
Excluding these two items, the remaining four represent
the claims of these factors, interest for capital, rent for
land, wages for labour, and earnings for the person who
undertakes the business of production As we have seen
in a former chapter, Production can be organised in more
ways than one, and a theory of Distribution can be worked
out for any method of organisation that may come into
existence , but wo shall confine our attention to the method
which exists in the present day, where a man (or a group
of men) undertakes a productive enterprise, and hires the
land, the labour, and the capital which is required in addition
to any which he may himself contribute We shall call

INTRODUCTORY

239

this man (he Producer 1 his position is distinguished by
the fact that, whilo he pays for the land, labour and capital
hired such sums as may be agreed, he keeps for himself
what is left after making these payments, and thus derives
no benefit for himself if his enterprise is a failure Under
this system of production, the questions that arise relate
to Rent, Wages, Interest and Earnings

It will bo noticed that the income nhich a producer
denves from Ins enterprise usually amounts to something
more than the earnings of Ins management ; it mcludes also
the remuneration due to each of the factors of production
which ho has contributed. When a cultivator, for instance,
has paid bis rent and interest and the wages due to his
labourers, tho balance of the produce m his hands is not
due solelv to his conduct of tho busmess he has laboured on
the land, at least as hard as any of tho labourers whom
ho has paid, and a share of the income is due to Ins labour ,
another share is due to his capital which he has employed,
and wo may say that the mcomo that is left to him consists
partly of wages, partly of interest, and partly of earnings
of management And in tho same way a man who owns
and manages a factory has a olaim both for the capital
invested in the factory and for Ins own work as manager ,
his income is mado up of these two elements . 2

1 English writers ha\ o at various times used different names for
this man , his position is exactly described by the French word
entrepreneur, and some English writers uso the word ‘ undertaker,’
which is its English equivalent "Unfortunately m ordinary English
tho word * undertaker ’ lias acquired tho special meaning of a man
•alio conducts funorals, and its use in any other sonso is at present
somewhat incongruous

* At the ponod when the science of Economics was being worked
out in Western Europe, it so happened that most of tho existing
production was earned on by men who supplied some part at least
of tho capital used, and at first a distinction was not clearly drawn

240 AN INTRODUCTION TO ECONOMICS

The producer is not the only man whose income may
be derived from two or more sources When a landholder
lends capital to his tenants, ho charges interest on the
loan quite apart from the rent on the land, so that his
income is made up partly of rent and partly of interest
When he invests capital m improving the land, he also
charges the tenants with interest , m this case, however,
the charge is usually made m the form of an addition to
the rent, and consequently we find tenants paying under
the name of rent a sum which represents partly rent in
the strict sense and partly interest on capital For some
purposes the economist has to distinguish between these
fr«o items, because the laws that determine the amount
of rent are not the same as those which determine the
amount of interest

Thus the economist cannot always discuss men’s incomes
as a whole , he has to examine the sources from which the
income is obtained, and must give separate consideration
to tbe part earned by each separate factor of production.
And on the other band, he has to be careful to mclude m
his examination all that is really earned the remuneration
of some people is made in such a way that part of it may
easily be overlooked For instance, in some parts of India
a groom gets wages of three rupees a month, and a careless
person might take this sum as representing his income ,
but such a man usually gets, in addition to the money,

between tbeir earnings and tbe interest on their capital , their ■whole
income was described as Profits But as the study of the subject
advanced, it was found that no satisfactory theory could be stated
regarding the rate of profits, because the two elements (earnings and
interest) which compose it are not determined by the same laws
It was thus found necessary to distinguish between the two elements,
even when both are taken by one man , and where the older writers
discuss profits, most modem books contain separate discussions of
interest and earnings.

INTRODUCTORY

241

free lodging for himself and his family, a certain amount
of gram for food, a blanket for the winter, and perhaps
some other items. All these must be taken into account
in calculating the mcomo that he receives as remuneration
for his work, and not merely the money that is paid to him ;
and the same is true of all persons who obtain benefits
apart from the monoy that is paid directly to them, whether
those benefits take the form of a house free of rent, a pension
in old age, free medical attendance, or whatever the benefit
may be so long as its value can be stated m terms of money
In examining then the distribution of wealth, the
economist considers the whole of what each man gets for
each single factor of production that he provides , where
men provide only a smglo factor, he can concern himself
directly with their total income, but when they provide
more factors than one he must concern himself separately
with the parts of their income due to each factor We’
proceed to consider in this way the causes that influence
the rates of interest, rent, and wages and other earnings
We shall find in this study that the factors of production
can be regarded very much m the same way as we regarded
commodities in the preceding Book there is equilibrium
between the supply and demand m regard to land, laboui
and capital just as there is in regaid to commodities, tl e
rate of rent, or of interest, or of wages being regarded as
the price paid for the services of those factors But at
the same time there are special features to be allowed for
in the case of each factor, so that neither land nor labour
nor capital can be regarded simply as a commodity
There is an apparent distinction between commodities
and the factors of production that may be noticed before
we enter on the discussion which has been indicated above
As a matter of fact, at the present day most commodities

Q

242 AN INTRODUCTION TO ECONOMICS

are obtained by a single payment representing the price,
while the payments for the factors of production are as
a rule made periodically and depend in amount on the
time for which the factor is used , m other words, most
commodities arc bought, but most factors of production
are hired This apparent distinction is, however, of little
or no importance On the one hand the hiring of com-
modities is by no means uncommon though it is not so
common as buying , we constantly hire conveyances of
various sorts, we hire houses to live m, and sometimes
we hire things like furniture or cooking vessels for temporary
use On the other hand land may be bought for use in
production, though as a matter of fact it is more commonly
hired , vlnlo slaves could be bought m India not very
long ago, and can still be bought m some parts of the world,
and employed as labourers in production The distinction
between buying and hiring then does not m fact mark a
difference between commodities and factors of production,
and at the present stage students can safely leave it out
of account wo have to consider the way m which the
payments made for the factors of production are determined,
and it does not matter that these payments are made
periodically instead of being made once for all

CHAPTER XXXIII,

INTEREST ON CAPITAL

Wr do not laics', exactly when the practice of paying
interest for the use of capital arose m India Wo have
seen in Chapter XH. that it cannot hare amen until the
process of saving had begun, bccauso the stock of accumu-
lated wealth from which capital is drawn depends on saving
for its existence It seems probablo that when saving
had begun, people at first used their wealth mainly as
capital in their own business, and that the practice of lend-
ing it to other people on interest camo gradual^ into exist-
ence ; wo do not know for certain that this was the case,
but w o will assumo that it was, and wo will take on imaginary
illustration from a vory early poriod of the process, which
will throw' light on tho nature of the transaction which we ■
nro considering.

Wc will supposo that a cultivator’s plough-bullocks have
died suddenly, and that he has not got any accumulated
wealth which he can use to buy now ones. He knows that
a neighbour has saved up a considerable stock of gram,
and ho asks that neighbour to lend him enough of it to
buy tho cattle which ho needs Tho neighbour replies that
ho w'ants to spend tho gram for his own satisfaction, say
in buildmg a now house for himself : the cultivator urges
that ho does not want the now house at once, but could

244 AN INTRODUCTION TO ECONOMICS

wait for a year until the loan has been returned The
neighbour in answer to this aslcs, Why should, I wait ?

The cultivator can reply in one of two ways , he may
urge that they are relatives or old friends, and that his
need is very great because he cannot hve unless he ploughs
Vna land , and if his neighbour listens to these arguments,
the loan is given as a mattor of friendship or charity, and
the question of interest does not arise But on the other
hand, the neighbour may not be inclined to act charitably,
and the cultivator may say “ I will make it worth your
while to wait, because next year I will give you back more
gram than you lend , ” and after bargaining, the loan may
be arranged on condition that twenty-five maunds of gram
are advanced, and thirty maunds are to be repaid after a
yeaT This is a loan of capital at twenty per cent for
a year

Students may well consider this illustration m some
detail, because it bnngs out clearly the fundamental facts
of a loan at interest The borrower wants the immediate
use of a certain amount of wealth, and m order to satisfy
his want he is willing to pay something at a future time :
the want is just like those wants which we considered m
Book III , and he will give some wealth in order to satisfy
it, just as a man gives a rupee to buy a ser of ghi The
lender on the other hand is m possession of wealth which
he could use to satisfy some of his wants , but he decides
that some more wealth received in a year’s tune will enable
him to obtain more satisfaction on the whole than if he
spends Ins existing stock at once , it is worth his while to
wait, because he will be able to satisfy more wants m a
year’s time than he could satisfy now , he will secure more
satisfaction by waiting than by spending at once
We have supposed above that thero is bargaining between

INTEREST ON CAPITAL 245

the two parties before the amount to be paid as interest
is settled it is obvious that their position m this respect
is the same as that of buyers and sellers of a commodity.
The borrower naturally wants to pay as little as possible,
and there is a limit to the amount which he will pay, just
as there is in the case of a purchaser If the borrower
should find, for instance, that he would have to pay twice
the loan as interest, he might decide that the charge was
greater than he could possibly hope to pay, and no loan
would be made and even though he calculates that he
could manage to pay fifty per cent as interest, he wall not
offer to pay so much if there is any chance of the lender
being content with less The lender on the other hand
wants the highest possible interest there is a limit below
which he wall not lend, but he will take more than this
limit if he can get it.

Even then m such isolated transactions at an early
period in the organisation of production, a loan of capital
is settled in very much the same way as the sale of a com-
modity. At this stage there is of course no regular market,
if — as we have assumed — such transactions are at first
rare , and in fact a market for capital can scarcely be
said to exist even now m many of the villages of India
The development that has taken place has, as in other
matters, been the growth of customs, differing in detail
from village to village It is obvious that a man who has
once made a loan and had it repaid with interest will in
many cases be i ready to make further loans, and as time
goes on his family may develop a regular money-lending
busmess , while cultivators who want capital will naturally
apply to a man who is known to have lent money before
We can thus see how the existing conditions in villages
have grown up a large number of the inhabitants want

246 AN INTRODUCTION TO ECONOMICS

to borrow money from time to time, and there are a few
men (perhaps there is only one in a village) ready to lend
money provided they can get a rate of interest which they
consider satisfactory The position of these money-lenders
is very similar to that of the retail traders, whom we con-
sidered in Chapter XXVIII they fix the rate of interest
which they charge, just as retailers fix their prices of gram,
but the rate is limited by the fact that if it is too high
fewer loans will be made, and their income from interest
will bo reduced While then such money-lenders have
usually customary or standard rates of interest, they modify
their charges in accordance with changes in the demand
for capital they will lend money below their customary
rates rather than keep it unemployed, and they will charge
more than usual at times when the demand for money is
great

There is then no regular market for capital m ordinary
villages, just as there is in them no regular market for
gram or other produce To find a market for capital we
must go to the cities and towns In them we find the
conditions which constitute a market on the one side
a large number of people anxious to borrow, and to get
the capital they require at the lowest possible rate and
on the other side a number of people with money to lend,
and anxious to get the highest possible rate of interest on
it The lenders consist mainly of the banks, which have
been described m Chapter XVI a large part of their
business consists, as we have seen, m collecting the savings
of individuals and lending the sums collected so as to make
a profit A bank which is paying interest on the money
which it holds obviously cannot make a profit unless it
lends that money at a higher interest than it is paying j
and consequently every bank wishes to have as much as

INTEREST ON CAPITAL 247

ptw-ihle of it* money lent out at the highest rate of
itittn-t wh*ch it can get, keeping m its hands only
enough to meet the claims of tho<*o depositors who may
want their money hack at once The banks, therefore,
ns lendtrs arts in a position similar to that, of the sellers
m the market of a commodity; they want to lend their
money jn«f ns the rollon want to sell their grain , but
liter want to get the highest possible rato for their loans,
just ns the sellers want to get the highest possiblo prices
for their grain , ami they compete with ono another m
the attempt to secure what they want.

The borrowers mclndo all the persons who want money
for any purpose ; these purposes aro very various, but
the feature common to all is that iho borrowers want to pay
as low a rato of interest ns possiblo. Tlio borrowers aro
thus competing among themselves for the monoy that is
available, while tlio banks aro competing to lend tho monoy
which they possess; and wo thus find all tlio foatures of
an organised market, just like tho wliolesalo wheat-market
which we described in the previous Book.

Following the ordinary use of language, wo have spoken
of tho transactions carried out m such a market ns made m
money' It is in fact rare for a producer to borrow the
actual capital which he needs ; ns a rule, he bonows monoy'
with which to provide that capital The oultivator m
our opening illustration did not want the wheat he borrowed
for uso ns wheat ; ho wanted cattle, and ho borrowed the
wheat to give m cxchnngo for them In the same way a
man who wants to set up a factory does not borrow tho
particular items of capital winch he needs, tho bricks,
mortar, timber, machinery and so on , ho borrows money
to pay for these We have excluded a discussion of the
meaning of money from this introductory course, but

248 AN INTRODUCTION TO ECONOMICS

students are already familiar -with the fact that the •word
means something more than pieces of coined metal, and
that a man who borrows a laldi of rupees no longer needs
to have a cart loaded with the silver corns, but can handle
the loan in various convenient ways This knowledge
is sufficient for our present purpose, and we shall continue
in this chapter to speak of the transactions we are con-
sidering m terms of money, remembering that it is not
the money which borrowers really want but the various
things which the money can be used to pay for.

One point in this market for money deserves special
notice In discussmg the wheat-market, we saw that
dealers have to pay constant attention to the conditions of
supply and demand m other places, because wheat can be
taken from one place to another and will ordinarily be taken
for sale to those places where the price is highest But it is
much more easy to move money than it is to move wheat
or 6ome simihr commodity , students will not realise the
truth of this statement fully until they have mastered
the subject of Credit, but it is obvious that a lakh of rupees
can be sent say from Calcutta to Cawnpore in the form
of currency notes very much more cheaply and quickly
than wheat to the same value could be transported And
even currency notes are comparatively a clumsy method
of transferring money from one market to another with
the existing organisation of banking and credit, a telegram
of a very few wordB is enough to transfer the largest sums
from Calcutta to Cawnpore, or Bombay, or Rangoon, or
London In this way money can be sent to any part of the
world where at the moment it can earn the highest profit,
and a banker in Cawnpore or Delhi has to know the con-
ditions regarding supply and demand which prevail not
merely in the cities of India but m other counties such

INTEREST ON CAPITAL 249

as England, and America, and Japan. Thus the market
m question is even more highly organised than the market
for wheat, but the organisation is of the same kind. Let
us examine m a little more detail the conditions of supply
and demand m such a market
We have seen that in a market for commodities the
general law is that the amount demanded falls when the
price rises, and rises when the price falls This is equally
true as regards money Borrowers want money for a large
variety of purposes, but most of it is wanted m order to
make a profit by using it in production, and producers will,
os a rule, employ more and more money so long as they
can get a profit by its use. The individual producer is
constantly asking himself the question : Can I employ
more capital with advantage or not ? He calculates, for
example, that he can increase hiB income by two
thousand rupees a year if he employs ten thousand
rupees in setting up certain new machines . he knows
that in order to provide for depreciation he should set
aside one thousand rupees yearly from the additional
income, and he has to see if it is worth his while
to set up the machines for the sake of the income of
one thousand rupees that is left when this provision has
been made The answer clearly depends on the rate of
interest which he has to pay for the loan * if he can get
it at four per cent , he will have six hundred rupees left
for himself as earnings, and he will almost certainly make
the investment , while if he finds that he would have to
pay ten per cent , he sees that there would be nothing left
for himself after paying the interest, and he will not, as a
rule, think this worth his while. If we suppose that he
can get the money for something less than ten per cent ,
bo that he can hope to earn a small sum, say fifty or a

250 AN INTRODUCTION TO ECONOMICS

hundred rupeeB a year, his course of action, is doubtful t
some men would think it is just worth their while to buy
the machines, and others would, after hesitating, decide
against it

In the same way, the extent to which money is borrowed
for dealers’ transactions depends very largely on the rate
of interest A dealer, for mstance, who buys wheat from
cultivators at harvest, must as a rule have money to pay
the price in cash for each lot of wheat that he buys He
may calculate that by buying wheat in the villages and
selling it in a distant market, he can make a profit of two
rupees per cent in two months after paying all necessary
expenses such as the cost of carrying the wheat from the
villages to the market is it worth while to borrow money
m order to carry out this transaction ? Two rupees per
cent for two months is at the rate of twelve per cent
for a year , and if the dealer finds that he would have
to pay twelve per cent or more for a loan, he obviously
will not borrow On the other hand, he would probably
borrow a large sum if he could get it for four per cent ,
while when the rate is about ten per cent , he will be
doubtful whether it is worth his while to borrow or not,
and different dealers will decide this question in different
ways

Almost all classes of borrowers then are in the same posi-
tion There is an upper limit at which they will not borrow
at all, because there would be nothing left for them after
paying interest at that rate This limit is not the same
for all borrowers , it varies with the nature of the trans-
action, but whatever it may be, the general fact remains
that uhen the rate is below this limit, the lower it is the
readier will men be to borrow Thus m a large market,
whatever the rate may be, there will always be men who

INTEREST ON CAPITAL 251

are bout-nting whether to borrow or not, and other men
in ‘Minting ns to the amount they will borrow ; and even
a small change in the rate will a fleet their decision So
far then as the demand is concerned, moncj* can bo regarded
d-f- a commodity, and the general law of Demand appbes
to it

Turning now to the question of supply, the money that
is ready to be lent at any moment is almost entirely m
the lnnds of the banks and of those firms winch do banking
business without calling themselves banks At very low
rates, some or all of these institutions will not lend money
at all , and the higher the rate which can be got, the more
re n dy will they be to lend in larger and larger amounts
It is easy to see, therefore, that the supply of money in
the market wall be increased when the rato rises, just as
the amount of wheat offered for sale is increased when
the price is raised , in fact, it is easier to increase the
supply of money than of wheat for the reason (which has
already been mentioned) that money can be moved from
place to place more easily and more quickly than wheat
Thus on the one hand wo have a number of borrowers
anxious to borrow at the cheapest possiblo rate, and on
the other hand a number of lenders anxious to get the
highest rale they can , and the bargaining that goes on
between the individuals determines for the moment the
market rate of net interest, at the point where the Demand
and the Supply are equal

The expression net interest which we bavo just used
draws attention to an apparent difference between interest
and prices, which will bo explained in the next chapter.

CHAPTER XXXIV.

INTEREST ( Continued )

Students will remember that when we were describing a
market for commodities, we laid stress on the fact that
though the pnce may change very rapidly, there is at any
moment only one equilibrium-price wheat, for instance,
cannot stand at the same moment at sixteen and at fourteen
sers A slight knowledge of the market for capital suggests
that this is not true in the case of interest some men w ill
be borrowing at five per cent , while others have to pay eight
or ten or twelve per cent , and it looks as if there were no
such thing as a market rate of interest, corresponding to
the market pnce of wheat The reason for this apparent
difference is to be found in the fact that what is called
interest m everyday talk mcludes not only payment for
the use of capital, but also payments of other kinds Econo-
mists thus find it convenient to draw a distinction betw een
gross and net interest Gross interest is what we mean by
interest in ordinary talk, the whole amount that a borrow er
has to pay, while net interest is that portion of the gross
mterest which is paid simply for the use of capital.

Gross mterest ordinarily mcludes payments on account
of two items in addition to net mterest One of these is
uisurance agamst the risk that the borrower will not return
the capital when it is due The seller of a commodity has

INTEREST

253

not to consider a question of this kind, because his transac-
tion is complete when the commodity has been delivered
and its pneo has been received , but a loan of capital is
a transaction extending over a considerable period of time,
and it may happen that during this time the position of the
borrower changes so that ho is unable to fulfil his promise
to repay. If, for instanco, he has borrowed m order to
buy niacluncry, he may find that the machinery he has
bought is unsuitable, and yields him no profit ; or if he has
borrowed to buv grain or otbor produce, prices may have
fallen so much that ho has lost money instead of gaming
it by his transactions. There is thus a risk that the borrower
may be unable to return the capital ; and the lender guards
himself against tills risk by charging in every case some-
thing moro than the net interest. If we suppose that a
man who has lent Rs. 10,000 in small Bums to a large
number of people charges each of them two per cent to
cover this risk, then ho hopes to receive Rs 200 m a year
in addition to the net interest If he finds at the end
of the year that all Ins capital is repaid, ho has gamed
Rs 200 ; while if his debtors are unable to pay Rs 500 in
all he has lost Rs 300

A moneylender or banker regulates the amount of his
charge for insurance against risk according to the view
he takes of the risk in the case of each borrower If he
knows that a particular borrower is both honest and
prosperous, the charge ho makes will be small , if the
borrower is not prosperous, the risk that he may be unable
to repay becomes much greater, and the extra charge is
much higher , while if the borrower is thought to be dis-
honest, and likely to refuse to pay when the time comes,
no one will lend him money except at a very high charge
indeed In ordinary business a man’s credit is said to be

254 AN INTRODUCTION TO ECONOMICS

good if people generally expect him to pay his debts, and
bad if they think he will be either unwilling or unable to
pay , and a man’s credit may bo measured by the amount
that ho is charged for loans Again the charge for in-
surance will vary greatly according to the nature of the
security that the borrower gives. Sometimes a loan may
be given on what is called the personal security of the
borrower, that is, simply on the borrower’s promise to pay
Loans on the personal security of the borrower are naturally
given only to men whose credit is good, and even then the
charge is usually high because there is the risk that a man
may become unable to pay even though he wishes to do so
Such a man can get a loan at a substantially lower charge
if two or three other men, whose credit is also good, agree
to be security for him, that is, to be responsible for the loan
if he fails to pay. The charge is less m this case because
there is much less nsk that three or four persons wall
become unable to pay than that one man will default
Or a man may give some tangible security, which the lender
can realise in case of default , he may pledge jewels, or
mortgage a house or land, and if this security is easily
realisable the charge for risk may be very low. But in
practically all cases of loans to private persons the sum
charged as interest mcludes a charge for insurance against
nsk m addition to the net interest
The second kind of payment usually included in interest
is a charge for the work done by the lender, in fact his
earnings of management It may vary according to the
trouble that he has to take m each case, for instance, in
making sure that a mortgage is legally valid, for storing
jewels pledged to him so that they may not be stolen, for
finding out how the borrower’s credit stands, and so on
Thus to ascertain the net interest, we have to deduct from

INTEREST

255

tho charge actually made something on account of msurance
against nsk, and something on account of earnings of
management

An example will make tho relation of not to gross interest
more easily understood We will suppose that on a par-
ticular day a bank makes loans to different persons at
6, S, 10 and 12 per cont , and wo will also suppose that the
hank charges m each case 2 per cent on account of its
earnings. Deducting this 2 per cent , we see that the
various borrowers are paying 4, 6, 8 and 10 per cent, to
cover both net interest and msurance The rate of net
interest is the same m the case of all the loans made at the
same time, and we may take it at 3J per cent , and by
deducting this sum we can see what each borrower is
paying as msurance The first borrower is only charged one-
half per cent , and we may be sure that his credit is very
good, and that he has given very satisfactory seounty.
The others are charged respectively 2J, 4 J and 61 per cent
by way of insurance The manager of the bank has con-
sidered the credit of each of them and the nature of the
security which each has offered, and has fixed these charges
in the light of liis experience so that, to tho best of his
judgment, the bank will not lose money in the long run
by some of its debtors failing to pay ; he knows that m
the ordinary course of business some debtors will fail
to pay, and he calculates that such losses will be just
about covered by the charges which he makes
It is then the market rate of net interest which is deter-
mined by the conditions of supply and demand that prevail
at any moment in the market , and the gross interest,
which individual borrowers have to pay, is made up of
this net interest and of the other items that have been
described above. It is not easy for students to know just

256 AN INTRODUCTION TO ECONOMICS

what the net rate is at any moment, because the market
reports which are published in the newspapers do not
distinguish the various items as we have done , but an
idea of its fluctuations during short periods can be got by
watching the changes m what is known as the Bank Rate.
From time to tune each of the three Presidency Banks —
(i c the Banks of Bengal, Bombay and Madras) announces
the lowest rate at which it will lend money on perfectly
good security At one time, when the demand for capital is
small compared with the supply, tho bank rate may stand
at four per cent or even as low as three per cent , then
when the conditions of supply and demand change, the
rate may rise rapidly to six or seven per cent , and occa-
sionally even higher These changes m the bank rate
indicate the changes in the market rate of net interest,
the net interest is less than the bank rate, because the
latter includes charges for management, and a small charge
for risk, but these do not vary greatly m a short period of
time, and, consequently, it is safe to conclude that a rise
of one per cent m the bank rate indicates a rise of about
one per cent m the market rate of net interest
In the case of a market for a commodity, we saw that
at any given time there is a normal price to which the
market price tends to return , and in just tho same way
there is a normal rate of net interest When the market
rate rises, those persons who have been hesitating whether
to borrow or not will decide not to do so, and m this way
a rise in the rate will operate to reduce the demand for
capital On the other hand, a rise m the rate will make
lenders more ready to lend , and so the supply is increased
while the demand is reduced A rise in the market rate,
therefore, affects the demand and the supply in such a
way as to lead to a reduction in the rate , w hile a fall in

INTEREST

257

tho rate, by inducing people to borrow and making lending
less attractive, tends to make the rate rise again The
relation of the market rate to the normal rate is thus
precisely the same as that of market to normal prices
There is, however, one peculiarity that requires notice,
namely, the variation in the rate of interest with the season
of the year. A variation of this land occurs m all coun-
tries where a large proportion of the circulating capital
m use is employed in trade in agricultural produce, and it
is especially noticeable in India, where this proportion is
at present very high A largo variety of crops ripen m
tho samo month cultivators are anxious to soli their
produce as soon as possible, and at each haivcst there is
a large demand for capital to buy the produce and trans-
port it to the places where it will be consumed This
demand decreases when most of the produce has been
dealt with ; and so tho demand for capital is much higher
in some months than in others In Calcutta, for instance,
demand is slack and interest is low during the early part of
the rams, and tho bank rate at this period is low As soon,
however, as tho jute crop ripens, money is wanted to deal
with it, and the rate of interest, as a rule, rises rapidly ,
then more money is wanted for the nee crop m Bengal
and Burma, while by the time the cold weather begins the
Bombay market demands large sums to deal with the
cotton crop. The bank rate (which, as we have seen,
indicates the rate of net interest) is therefore generally
high or very high during the winter If the winter crops
are good, there is a further large demand for capital to deal
with wheat and oilseeds ; but as soon as this demand is
satisfied the bank rate falls again, and it is usually at a
mi nimu m in the rams until the next jute crop causes a
fresh rise to begin. Students, therefore, who wish to follow

R

258 AN INTRODUCTION TO ECONOMICS

the movements m the rate of interest that takes place from
month to month, must allow for the fact that the demand
for capital vanes very greatly with the season of the year,
and also for the fact that it varies from year to year with
the yield of the crops , and they will find that those varia-
tions account for changes m the bank rate, and are, m
fact, put forward to explain such changes in the reports
which most of the chief newspapers pubhsh regarding the
market m Calcutta or Bombay
Lastly, the fact must be emphasised that while at any
time there is a normal rate of interest to which the market
rate tends to return, this normal rate does not remain
fixed for a long period, but changes with the changing
conditions of the country We are not yet in a position to
consider this subject in detail , students have first to
master the movements in normal values, a subject of which
the full consideration has been postponed (Chapter XXX.),
and then to apply their knowledge to the long-period
movements in the rate of interest For the present, all
that can be done is to indicate some of the causes which
may result m changes in the normal rate, leaving the study
of these causes for the future
It is easy to see that the demand for capital must in-
crease with the progress of the organisation of production
We have seen m Book H that this organisation involves
the employment of more and more capital, and that it
depends on the supply of capital in sufficient quantity
If this tendency stood by itself, increased demand must
brmg a higher rate of interest, and the development of
production must thereby be checked But the tendency
does not stand by itself, for while the demand for capital
increases, the supply increases at the same time The
supply of capital depends, as we have seen, primarily on

INTEREST

259

people being able to save — that is, on their getting more
wealth than i*« required for immediate consumption The
organisation of production increases tho supply of wealth,
and consequently makes it possiblo to save a larger
amount And while increased saving becomes possiblo,
the progress of tho country renders it at tho same time
more likely * pcoplo tbmk moro of tho needs of the future,
and realise the advantages of saving moro clearly, and they
also realise the advantages of employing their savings as
capital instead of hoarding them in nnproductno forms.
Tims tho prospect for tho future is that both tho demand for
capital, and tho supply of it, will increase , and the question
whether tho normal rate of interest will riso or fall depends
on tho relatn o speed in tho increase of tho supply and tho
demand Some economists have looked forward to a time
w hen tho supply of capital wall bo so great that it cannot
all bo utihsed in production, and it is conceivable that this
may como to pass On tho other hand, tho study of
economic progress suggests that there may always be room
for all tho capital that becomes available, and, in any
case, tho need for more capital in India (and m other
parts of Asia) is so enormous that tho question whether
it will ever bo completely satisfied has no present interest
for the student

CHAPTER XXXV.

INTEREST ( Continued)

We must now resume our consideration of the rates of
interest that are paid in Indian villages We have seen in
Book IV that the retail price of a commodity such as
•wheat does, in fact, depend very largely on the -wholesale
price as settled in the large markets, and that the con-
nection between the two prices is becoming closer with the
development of means of communication a similar
statement cannot yet be made with regard to the rate
charged for loans to cultivators, and one of the greatest
needs of the country is the establishment of such a con-
nection so that the agricultural industry may have access
to the great store of circulating capital which is con-
trolled by the markets in the cities of India
It is stall, broadly speaking, true that there are no
regular markets for the capital required for agriculture
Each village, or group of villages, depends for its supply
on a few local moneylenders, and probably, m the majority
of cases, these moneylenders are independent of the mam
banking-system of the country ; each of them owns a
certain amount of capital, and lends it at the high est rates
he can obtain m the neighbourhood, but they do not t.Vnnk
of obtaining additional capital from the banks when the
amount which they possess is insufficient The ordinary

INTEREST

261

cultivator is accustomed to deal with a particular money-
lender, and it is not easy for him to leave that money-
lender and go to another . custom, as we have seen, is a
strong force in the villages, while a large proportion of the
cultivators are, at any given time, m debt to their money-
lender, and if one of them should attempt to leave him,
he would at once be pressed for the money which he owed,
and might be ruined by litigation The net rate of interest,
as determined in the city markets, has, in consequence,
veiy little direct influence on the amount of gross interest
which the cultivator pays , he pays whatever rate is agreed
upon with the moneylender with whom he deals And,
in bargaining for a loan, he does not meet the money-
lender on equal terms , his need for money is urgent,
and, as we have seen, he cannot go from one lender to
another finding out who will lend at the lowest rate , he
has, therefore, very often to agree to whatever rate the
moneylender chooses to fix, and the lender fixes the highest
rate that a man who urgently needs money will agree to
pay. The consequence is that the gross interest charged
on capital lent for employment m agriculture is very high
indeed in large parts of northern India it ranges from
25 to 50 per cent annually, and these very high rates are
a serious cheek on the prosperity of the whole country
It is probably true that almost every cultivator in the
country could increase his income substantially if he could
borrow the capital he needs at even as much as twelve per
cent , but the charge of 25 to 50 per cent makes it, in
many cases, impossible to make a profit, and consequently
the annual production of wealth in the country is very much
less than it would be if capital could be borrowed on more
reasonable terms

This position is not peculiar to India , the same thing

262 AN INTRODUCTION TO ECONOMICS

is more or less true in every country where the holdings
are so small that cultivators cannot deal directly with the
ordmary banks, and whero special arrangements have not
been organised for supplying the capital which they need
We have said in on earlier chapter that tho ordinary
banks cannot deal directly with the cultivator , but let
us suppose for a moment that a bank decides to make tho
attempt, and opens branches say at tho headquarters of
each subdivision of a district The manager of each branch
will then have to fix his charges for loans m tho way which
has already been described in addition to interest, m tho
strict sense of tho word, ho will have to charge something
for the cost of management, and he will have to charge
enough by way of insurance to secure tho bank against tho
risk of loss In order to do thiB, he will have to know the
credit of each cultivator who comes for a loan , these men
will come from several hundred villages, and tho manager
must know the position and the character of each Now,
even m a single village it is not easy to find out an indi-
vidual's oredit, and such a bank would have to keep up
a very large staff to make tho necessary enquiries, and would
also have to take many more precautions against loss than
suffice m its ordmary business. The charges for loans
would therefore be high, because (1) the cost of manage-
ment would be very large relatively to the amount of
money lent, and (2) the charge for insurance against risk
would be much higher than in ordmary banking
We have taken this imaginary illustration in order to
bring out clearly the fact that dealing with small cultiva-
tors is an expensive and nsky business, and that, if the
gross charge for capital is to be kept down, some special
arrangement^must be organised to avoid the expense and
the risk. This is one of the chief aims of the system of

INTEREST

263

co-opcratiYo credit w Inch is now being established in many
parts of Lidia At a later stage students will have to pay
close attention to this system, and, for the present, we will
use it only as a further illustration of the nature of the
interest that is paid in the villages
It is now possible for a group of cultivators in a village
to form a co-operativo credit societj', and when the society
has been legally constituted it can borrow in a single
transaction all the capital that its members require. Thus
if fifty cultivators join the socioty, each of whom wants
a loan, some wanting twonty rupees, some wanting thirty,
and so on, to a total of Rs 1,200, the society can borrow
that sum and distribute it among its members A bank
or other lender will clearly find it muoh easier and much
safer to lend to the society than to lend to its members
individually instead of fifty separate transactions it
has only to enter into one, and it has only to consider the-
credit of the society as a whole, instead of the credit of
each separate member The lender can thus charge very
much less for management , it costs him no more trouble
to lend Rs 1,200 than to lend Rs 20, and m this way the
existence of the socioty reduces the gross interest materi-
ally by reduemg the charge for management The charge
for insurance against nsk can also be reduced It is a
standing rule in these societies that each member is hable
for all the society’s debts , that is to say, if the society
should fail to pay its debts, any single member might be
made to pay the whole, if the other members could not
contribute Now people will not join m a society under
this rule unless each of them trusts all the others, and the
fact that a society is formed indicates by itself that all
the members can be trusted to pay their debts in all ordinary
circumstances, and, consequently, the credit of the society

264 AN INTRODUCTION TO ECONOMICS

is good There are also numerous provisions in the system
for ensurmg that the societies shall he worthy of trust,
and the result is that a loan to a society is attended with
very httle risk indeed, and the charge for insurance against
risk need not he large The gross interest, thoioforo,
charged hy lenders to such a society is very much less
than they would charge to the individuals of whom the
society is composed , it is less because hoth the charge
for management and the charge for insurance against risk
are very much reduced

We must pass over the other features of the co-operative
system, which are designed partly to strengthen the credit
of the societies and partly to give them access as easily
as possible to the stock of circulating capital which is in
the hands of the hanks So far as the system succeeds,
its result will he to make the interest charged to agri-
culturists depend on the market rate, very much in the
same way as the price of wheat paid to the producer
depends on the market-price of wheat The individual
cultivator wall then, hke the borrower m the city, pay
gross interest, consisting of the market-rate of net interest
with reasonable additions for cost of management and
insurance against risk , and the village-markets for capital
wall he connected wath the mam markets of the country
While, therefore, we have to recognise that at the present
time the rates of interest charged in the villages are not
determined in the same way as the prices of commodities, w r e
must also recognise that there is a tendency for them to he so
determined, and we may fairly expect that as time goes on
the position of capital will, in this respect, become more and
more similar to that of a commodity, and that the resem-
blance which already exists between the rate of interest and
the price of a commodity will become closer and closer.

INTEREST

2C5

So far, in this chapter, we have dealt with the question
of capital m the villages ; hut at the present tune it is tru«»
that even m the towns and cities the artisans and other
small producers borrow from moneylenders in much the
same wav as the cultivators, and that the rates which they
pay are practically independent of the market-rate of net
interest But in their case too the co-operative system
opens out a way of connecting them with the mam market,
so that there is a probability that the artisans like the
cultivators will, as time goes on, come mto touoh wnth the
market, and borrow on the terms rendered possible by the
conditions of supply and demand

Wo may now summarise our preliminary account of the
causes that determine the rate of interest Capital m
India is not yet m the same position as a commodity, but
it is gradually approaching to that condition. There is
already a market for capital in the cities, in wdnch the rate
of net interest- is determined by the conditions of supply
and demand, very much as the price of a commodity is
determined, and the gross interest charged to individual
borrowers in these markets is made up of the not interest
so determined, together with additions to cover cost of
management and insurance against risk The small
producers, whether in the cities or m the villages, have not
yot access to the mam market for capital, and the rates
winch they pay are still more or less independent of the
market-rate , but this condition is not likely to be per-
manent, and the probability is that as time goes on the
market-rate will have a wider and wider influence on the
rates charged to all classes of borrowers When, therefore,
students have mastered the mam theory of the equilibrium
of supply and demand, they can apply its conclusions to
the determination of the rate of interest as is done m the

266 AN INTRODUCTION TO ECONOMICS

English test-hooks on the subject They have to remember
that in India at the present day the rates charged on the
capital borrowed by small producers are not, as a rule,
determined in accordance with this theory, but still depend
mainly on the power of the individual lenders , but, at
the same time, this exception is likely to become of less
importance as time goes on, and the theory will approxi-
mate more and more closely to the facts of Indian in-
dustrial conditions.

CHAPTER XXXVI.

RENT OF LARD.

We have now to take up the next factor of production —
Land — and see how far the rent 1 paid for it can bo said to be
determined hke the price of a commodity by the conditions
of supply and demand In this discussion we shall confine our
attention to agricultural land rent of land required for
othor purposes is determined, to some extent, m the same
way as that of land taken for cultivation, and the study
of its pecuhar features can be deferred to a later stage

In the first place, we must recognise that though markets
for agricultural land can now be said to exist in India,
they have only recently come into existence, and their
organisation is much less perfect than that of the markets
for produce such as wheat Before the Muhammadan
conquest of northern India, the cultivator usually paid
to the Raja, whose land he occupied, a share of the produce
of his land at each harvest , but it would be a mistake to
regard this payment as being merely rent paid for the
right of occupying the land It included rent m this sense,

1 There is no reason why a man should not buy land to cultivate
instead of hiring it, and this is in fact sometimes done, though the
practice is rare in India The price of land is, however, usually
calculated either with regard to the rent which it will bring, or to
the revenue which is charged on it, which bears a fixed relation to
the rent , the market thus regards the rent as the real thing to be
determined

268 AN INTRODUCTION TO ECONOMICS

but it also included the cultivator’s share of taxation.
The Raja maintained some sort of government, and pro-
tected the cultivator (more or less completely) against
cheats and robbers, and the payments made by cultivators
formed part of the revenue expended on the government
of the state As a rule, a family remained in the possession
of the same land from generation to generation, and paid
the share of the produce as a matter of custom, and the
question how the share was determined m those times was
not a matter for discussion by economists The Muham-
madan rulers for the most part maintained this system of
tenure, but changes in the share taken by them were made
not infrequently thus at different times we find that culti-
vators were required to pay as little as one-tenth, or as much
as one-third, or even one-half of their produce Such
changes in the rate charged were not determined directly by
economic causes , they depended on the will of the Emperor,
just as the amount of taxation is now determined by the
will of the government , but, hke taxation, these changes
sometimes had important economic effects In some cases,
for instance, a cultivator might require more than half
the annual produce of his land to keep himself, his family
and his cattle alive , and when half the produce was taken
by the State, such a man would not have enough produce
left for his support, and he would probably abandon his
land and look for some other means of livelihood This
fact was apparently more or less recognised at the time,
and it imposed an economic limit on the share of the
produce taken by the government it was recognised that
the share taken should not be so large as to cause culti-
vators to give up their land , but subject to this limit the
cultivator’s payments were regulated by the decision of
the State, and not by economic causes

RENT 03T LAND

269

It is on tho whole correct to say that during these periods
landholders did not exist in northern India, if we mean
by tho word landholder a person who has a right of property
in a certain area of land, which he is free either to cultivate
for himself or to let out to cultivators The landholders
came into existence 1 mainly during the period of anarchy
which covered the greater part of the eighteenth century,
and then the development of markets for land became
possible, because the supply of land was now in the hands
of men whoso incomo depends on the amount of rent which
they can get for its occupation We will look at the
working of these markets and see how the level of rents
in them is determined

In this case we have to apeak of the level of rents, and
cannot speak of a single rate There ib, in fact, no general
rate of rent in the sense in which we have spoken of a
general rate of net interest. One rupee of capital is worth
just as much as any other rupee ; but, as we have seen m
Book II., one acre of land may aid in producing much more,
or much less, wealth than another acre, and the amount
of rent charged on eaoh acre depends on its productive
power This fact is familiar to everyone who knows the
rents of a village it would probably be impossible to find
a village of any size where the rent of every separate field
works out at the same rate per acre Thus, in northern
India one usually finds the fields which have the best
situation and are most fertile renting at from about eight
to fifteen rupees the acre, and the rest of the land paying
lower rates according to its quality, until we come to the

1 This great social and economic change receives perhaps less
attention than its importance merits m most text-books of Indian
history A sketch of its development lias been attempted by the
present writer m The Revenue Administration of the United Provinces

270 AN INTRODUCTION TO ECONOMICS

poorest outlying fields, which may rent for a rupee an acre
or less, and which are very commonly let free of rent or
cultivated by the owner himself When, therefore, we speak
of a rise or fall in rents, we cannot refer to a single market-
rate of rent, but have to remember that the rent vanes
ith the quality and position of the land. ; a rise in rents
means that all, or nearly all, of the various rates have
increased, and a fall means that they have decreased
The demand for land in the markets which we are
considering comes from the people who want to use it
for the growth of crops The largest part of the popula-
tion of northern India expects to make its livelihood by
cultivation, and each family wants to occupy enough land
to make this possible The classes who live by cultivation
are by temperament exceedingly conservative, and most
of them will go on cultivating so long as they can make a
living at all, rather than change to some other occupation ,
and, on the other hand, labourers who wish to improve
their position endeavour to get land in their village to
cultivate rather than go to work in the towns At the
same time, the people are not naturally inclined to take
land at a distance from their home ; they want it in the
locality where they live, and they will pay a very high
rent in that locality, though equally good land could be
got elsewhere at a much lower rent The consequence
of these tendencies of the people is that there is not a
large and well-developed market for land , there is rather
a large number of small local markets, and the level of
rents may at any time vary considerably from market
to market The demand for land m any Iocabty will
clearly increase as the population of the locality increases ,
for, as we have seen in Book II , the production from
a given area of land cannot be increased to an indefinite

RENT OP LAND

271

extent but sooner or later the Lav of Diminishing Returns
<.omc» into operation regarding it, and a point is reached
"here the crjienditure of more labour and more capital
on land already cult in nted becomes unprofitable In the
greater part of northern India the rural population is
noNN so dense that there is a keen demand , landholders
have no difficult}* m finding a cultnator for any land
that fall* \ncant, "lnle many cultivators have less land
than tho\ vant, and man} labourers are anxious to get
land m order to start cultivation for themselves The
demand is of the kind with v. hich nvo arc already familiar ,
the higher the rent that is asked for land of a particular
quaht} ,tho le<s will bo the demand for it, that is, the demand
dccnnscs as the rent rises, and increases as the rent falls

The supply of land will for a tame increase as the rent
rises , the offer of a higher rent may induce landholders
to let for cultivation land vluch they have hitherto kept
under forest, or hate set aside for grazing or for sporting
purposes , and so long as land remains available, the rent
v ill bo fixed by bargaining just bice the price of a commodity,
m ouch a "ay that the demand at that rent is equal to the
supply Up to this point then nvo can regard land as a
commodity the market is not, it is true, perfectly organ-
ised, and so the equilibrium-level of rents may not be
exactly reached, hut in any locality the tendency is for the
rents to he determined in this way. At this stage, too,
there would be a normal level of rents to Nvlnch thoy would
tend to return after each fluctuation of the market.

We need not, honover, consider this stago in detail
bccauso ue have to take into account the special feature
of the market "Inch arises from the fact that the supply
of land is limited in amount As population goes on in-
creasing, a time come3 when all the land suitable for

272 AN INTRODUCTION TO ECONOMICS

cultivation is already let, and then there is no possibihty
o£ increasing the supply in order to meet an mcrease in
the demand The conditions are then entirely different
from those that prevail in the case of a commodity, the
supply of which can be increased indefinitely This point
has already been reached m the greater part of northern
India , all the land fit for cultivation is already occupied,
and the supply cannot be increased further 1
To understand how rent is determined in these condi-
tions, we must go back to the argument of the last Book
and see what is the position in regard to bargaining when
the supply is strictly limited Let us consider the position
m a pargana where all the land that can be cultivated is
already let to cultivators , and let us suppose that the
cultivators as a whole axe just able to support themselves
in the way of life to which they are habituated — 'that is
to say, they are becoming neither richer nor poorer as a
class (though probably some individuals with exceptional
skill or diligence are getting richer, and others who are
lazy or unskilful are getting poorer) In this position
labourers who want to start cultivation, or cultivators
who want more land, can be satisfied only by taking the
land from the possession of someone else Let us confine
our attention to a smgle holding, and say that a new-
comer offers thirty rupees where the present holder pays
twenty-five On the supposition already made, the present

1 It is sometimes possible to mcrease the supply of fertile laud by
expending capital on reclaiming barren land Thus, very large
areas m the Fanjab have been made fertile m recent years by the
construction of canals for irrigation , and it is possible that methods
may be found of reclaiming tho large areas of shifting sand or heavy
clay that are at present unproductive But the eSect of such
improvements is temporary as population contmues to increase,
the land so made available becomes occupied, and tho position is
then the same ns before

RENT OE LAND

273

holder will see no chance of getting other land anywhere
cbo in the neighbourhood, and in order to keep the land,
which is his only means of support, he must offer to pay
more than thirty rupees , and if the newcomer bids thirty-
five rupees, he must offer moro, and so on In such a
position then, when the demand exceeds the supply, and
when landholders aro free to let their land to the highest
bidder, rent* will bo raised up to the highest level that culti-
vators mil offer rather than abandon their land.

It is not difficult to sco what this level will bo The
people who are competing for tho possession of the land
want it m order to mako a living from it It is obvious
that they will not agree to take it at a rent so high that the
income left after paying tho rent will not suffico to keep
them alive, but it is certain that, short of this limit, rents
will be forced up to the highest possible rate In conntnes
like most parts of India, where there aro few other means of
livelihood open to a cultivator, and wlioro tho people,
by custom and tradition, look to cultivation as the natural
mode of life, they wall pay a very large share of tho produce
in rent rather than lea’s o tho land, and may be left with
onh the barest, necessaries of life after they have paid for
the labour and capital that they cannot do wo thou t In
such on economic condition then, the normal rent of land
will bo tho entire produce that is loft after deducting the
necessary expenses of cultivation, including in this teirn
tho necessaries of existence for the cultivator and his
farnilj , the rent will be kept at this level by the pressure
of people demanding land, tho supply of which is strictly
limited Tiiore is no doubt that rents in most parts of
northern India would have reached this level at the present
day if it had not been for the tenancy legislation to which
wc shall refer later on.

s

CHAPTER XXXVIL
RENT (Continued).

1> the last chapter w o skotchcd the grow th of tho market
for agricultural land in northern India, and showed that
in the conditions which pre\aii at present an oxccss of
demand over supply must, in tho absenco of restrictive
legislation, lead to tho rise of rents up to the level wlicro
tho cultivators can only make a baro living, and wlicro tho
landholders can take all tho wealth which the cultivators
pioduce, excopt tho amount that is required to kcop thorn
alivo and at work But at other times, and in other places,
different conditions may prevail, and wo will now examine
the same question in a very different sot of conditions.
Wo will take an economic situation of tho land that was
considered by tho English economists w'ho first worked out
the theory of rent, and wo will assume that tho land is
cultivated by intelligent men, w ho can get tho capital and
the labour they require on oidmary commercial terms,
and who are ready to move from ono part of tho country
to another, or even to give up cultivation and take to some
other occupation, if it promises to pay them bettor To
simplify tho case, we will assume that these cultivators
do not themselves w’ork with their hands, but devote their
energies entirely to managing tho business of their cultiva-
tion , and that they keep detailed accounts of the income

RENT

275

and expenditure of each field, so that they know at;
any time how much each field is earning for them
The land which we are considering varies greatly in
fertility, but some of it is so poor that cultivators pay
no rent for it, while for the rest they pay rent that
varies according to its fertility We have now to see
how rents will be determined in the conditions which we
have described.

It is usual to speak of land which is cultivated but bears
no rent as bemg ‘ on the margin of cultivation ’ , that is to
say, its cultivation is only just worth while, and a very small
change in the conditions will induce the cultivator to give it
up A cultivator in the position which we have assumed
will continue to cultivate such land so long as its produce
suffices to (1) replace the capital expended on it , (2) pay
interest on the capital, and wages of the labour employed
on it , and (3) leave for himself a sum which he considers
reasonable remuneration for the work that he has done,
that is his earnings of management If the land does not
produce enough to cover these items, he will cease to culti-
vate it. Thus, if the prices of the produce should fall, the
land on the margin of cultivation would no longer be
cultivated This would mean that the supply of produce
in the market will be decreased, and if the demand for
produce is unchanged the decrease m the supply must
lead to a rise in price, which will make it worth while to
bring the marginal land again into cultivation On
the other hand, if the prices of produce should rise, the
margin of cultivation would extend , that is to say, culti-
vators would find it worth while to take up stall worse land,
because the higher prices would just make its cultivation
r em unerative In that case the increase in the supply
of produce would tend to lower prices. Thus, m the con-

276 AN INTRODUCTION TO ECONOMICS

ditions which we have assumed to oxist, the margin of
cultivation docs not consist permanently of land of a par-
t’cular degree of productiveness , cultivation will extend to
poorer soils whon prices rise, while the poorer soils lull he
left uncultivated when prices fall , and whatever the
prices may bo, at any time there will bo some land under
cultivation which only just pays its expenses, and loaves
nothing over which can bo claimed as rent

Of course the markot-prico for all produco of any par-
ticular land is the same, no matter on what quality of
land it is grown , purchasers are not interested in the
quality of the land, but only in tho produco Consequently
all tho land which is more productive than that on the
margin of cultivation will yield a surplus after repaying
tho expenses of production, and the amount of the surplus
will vary with its productiveness This surplus will, m
the conditions which wo' have assumed, bo the rent payable
to the landholder, because ho is m a position to claim it, and
none of the other people who take part in the production
can do so The labourer and tho capitalist are already,
as wo have supposed, receiving tho current rates of wages
and interest , they cannot ask for further remuneration,
or if they do the cultivator can refuse it, because ho can
get labour and capital at tho current rates The cultivator
himself is also being remunerated for his work at the
current rates , he would, of course, like to keep a part at
least of the surplus for himself, but there are numciou?
cultivators competing for a limited quality of land, and his
competitors will offer the whole surplus as rent, so he must
do the same. If the quantity of productive land were un-
limited, then the surplus would be divided between the
landholder and the cultivator by the process of barg&mmg,
but since the quantity of land is not sufficient to satisfy the

RENT 277

demand for it, the landholder is in a position to claim the
whole of the surplus.

This, then, is the classical theory of rent, stated m the
simplest terms Whatever the prices of produce may be,
some of the land under cultivation will only just remunerate
the labour, capital, and business management employed
on it this ‘ marginal ’ land will pay no rent, while all
the more productive land will pay as rent the entire surplus
of its production that is left after remunerating the labour,
capital and management employed on it It is convenient
to describe this surplus as the Economio Rent, to dis-
tinguish it from the rents actually paid by particular
cultivators

On this theory the Normal Economic Rent will be
determined by the normal prices of produce If prices rise,
it will pay to cultivate land which is less productive than
that previously on the margin of cultivation, and this new
and inferior land will then set the standard, and all land
that yields more than it will pay rent • in other words,
a rise of prices will cause cultivation to extend beyond its
former margin, and rents will rise all round If, on the
other hand, prices fall, the marginal land will go out of
cultivation, because its cultivation will no longer pay, the >
margin of cultivation will contract, and rents will show
a general fall Let us see what relation this Economic
Rent bears to the rents that would be paid by Indian
cultivators, if they were not restricted by legislation

In the first place, there is no doubt that the c margin
of cultivation ’ can be recognised m Indian conditions,
smce in village after village we can find land which it only
just pays to cultivate, and which does not, in fact, pay rent 1

‘■This point may bo insisted on, because it has been overlooked
by some Indian writers on Economics Much of the land which

278 AN INTRODUCTION TO ECONOMICS

Above this marginal land we find land of all grades of
productiveness, and the rent varies generally with the
productiveness of each field. The Indian cultivator,
however, is in a very different position from the men on
whom the classical theory is based he does much of the
labour and finds most of the capital besides domg the
work of management, and he does not separate in his own
mmd the remuneration due to each of these factors of
production He does not ask, that is, if his land is giving
him a fair return for his capital, fair wages for his labour,
and fair earnings of management , he does not even ask
if it is giving enough to replace the fixed capital that is,
being gradually used up He cannot, therefore, calculate
whether or not each separate field in his cultivation pays
him, on the hues of the calculation assumed m the classical
theory to be possible he pays cash or gram for certain
items of the cost of cultivation (the cost of the labour
which he hires, the price of seed which he buys, and so
on), and he calculates — or rather he learns by experience —
whether the rest of the produce of his holding is sufficient
to afford him a living and to pay the rent Instead, there-
fore, of asking whether the land pays the expenses of
cultivating it and leaves a surplus for rent, we must ask
Does it support the cultivator and leave a surplus 2
If now we bear m mmd the fact stated m the last chapter,
that m most parts of northern India competition for land
is keen, that cultivators have great difficulty m taking to
some other occupation, and that their whole habit of mmd
is opposed to a change of this land, we must conclude that,

is cultivated by the landholders under the name of LhudLasht
comes under this head , they cannot persuade any cultivator to
pay them rent for it, but thoy cultivate it themselves because it
just pays for the work done and tho capital expended, though it
provides no surplus that could be paid as rent

RENT

279

in the absence of restrictin' legislation, their rents arc not
hkily to la' U' s than the Economic Rent, and ma\ \ery
'H‘l* c f c'^1 it hi a coiMd"rable nmount Competition for
kit'd is m» hum that people ml! ho quick to offer higher
rent for run hml from w Inch a cultivator is making an
c v option r 1 income, amt they will offer at least as much
rent as will bring down the income to what other land is
inkling, that n to «iv, the landholder will bo able to
take at ha* ! the whole surplus as calculated m the classical
theory Rut cultiiatore will pn\ more than this lather
thin Is wo their hnd ; they will reduco their expenses by
working hauler them c elies and employing less hired
labour; they will do without some of the comforts of life
which they lin-ie hitherto enjojed; and they will fail to
proud#- for (ho replacement of the capital winch is gradu-
ally being med up. Ihcy will offer then a ront which docs
not Ionic* them sufficient return for their cnpital, their
labour and their management ; they may, m fact, keep for
thcnwlves only tho barest. ncce«aancs of hfo, and pay tho
rest of their produce to tho landholder as rent Of course
the landholder is not bound to take tho highest ront that
cuUnators would offer under tho pressure of competition ,
and manj Indian landholders do not, m fact, tako so much.
Rut landlords could take this amount if thoy wished to do
so, and the ordinary man takes as much as ho can get
We see then that tho theory of rent, which has been
worked out bj Western economists, applies, broadly speak-
ing, to India Where thero is competition for a limited
supply of land, the landholder can m any caso tako the whole
Economic Rent if ho chooses to do so, but tho ignoranco and
the poverty of tho cultivators may enable him to tako even
more than this In tho next chapter wo shall explain why
it is that government has introduced legislation to prevent

2S0 AN INTRODUCTION TO ECONOMICS

the landholder from taking so much, or, in other "words,
has decided that rents shall be determined otherwise than
by the existing conditions of demand and supply for land
Before, however, we leave the theory of rent, a few words
may be said on the relation that exists between the rent ot
land and the prices of agricultural produce It is not
unusual to find people arguing in conversation or m the
newspapers that an increase in the level of rents leads to
a rise in the price of food-grains, or, in other words, that
prices depend on rents , speaking generally, this is exactly
the reverse of the truth, and m fact rents depend on prices
This conclusion follows clearly from what has been said
above, regarding the way in which the position of the
margin of cultivation is determined by the prices obtainable
for produce The price just repays the cost of cultivating
the ‘ marginal ’ land, and thus sets the standard by which
the Economic Rent is determined , if prices rise, poorer
land is taken into cultivation, and if they fall, the worst
land is left uncultivated, so that in either case the standard
by which rent is determined is changed , that is to say, rent
depends on prices This truth is commonly stated m the
form of a law that * Rent does not enter into the expenses
of production * The expenses of production, which at
any time set the standard of price, consist of the cost of
cultivating the ‘ marginal ’ land, which pays no rent ;
and their amount cannot depend on the amount of rent
which is charged on the more pioductive land

CHAPTER XXXVIII

LIMITATION OP RENTS BY LEGISLATION.

We have seen in the last chapter that the economic causes
at work in northern India, if they were allowed to work
without interference, would result in a very large share of
the produce of the soil being paid to landholders as rent,
while the cultivators would keep little or nothing beyond
the barest necessaries of life We have also indicated that
the working of these causes is interfered with by legislation,
which limits the amount of rent that a landholder can
claim, and aims at leaving to the cultivator part of the
produce which would otherwise go to the landholder.
This legislation is exceptional * the Indian government
makes no attempt to fix prices, or wages , 1 or the rate of
interest, but leaves them to be determined by the action
of economic causes, and , its exceptional interference in
the case of rents requires justification A full discussion
of this question would extend fax beyond the scope of the
present work The action of government is directed to
secure many objects, the discussion of which forms part
of the science of Politics ; the economic prosperity of the

1 Students will find later in their course that the governments
of some countries are taking notion to regulate the standard rates
of wages m certain cases somewhat m the same way as the Indian
government regulates rent, but this question has not yet arisen
in India

282 AN INTBODUCTION TO ECONOMICS

country is one of these objects, and a most important one,
but it is not the only object , and a government may
sometimes have to choose between promoting economic
prosperity and securing some other aim We must pass
over, therefore, many of the arguments which justify
tenancy-legislation, and confine ourselves to those which
have a direct economic bearing From this point of view
the great argument in favour of such legislation is that the
unrestricted nse in rents must operate m the long run to
reduce the mcome of the whole community.

In order to understand this argument, we must pay some
further attention to the idea of the Fertility of the soil,
which we discussed briefly m Chapter VII It would be a
great mistake to regard the soil as a sort of storehouse from
which food and other agricultural produce can be ex-
tracted , it is much nearer the truth to regard it m the same
hght as we regard a horse or a bullock We know that m
order to get from a horse or a bullock the best work of
which it is capable we must feed and tend it carefully ;
we can get an extra amount of work from it for a short time
by over-working it, but when it is treated in this way it
very soon deteriorates, and can do less work than before
These statements are, broadly speaking, true of the soil.
The fertility — that is tne productiveness — of any ordinary
field can be seriously injured m a very short time by
improper methods of cultivation, which may secure a small
gam in the present, but at the cost of a much greater
loss in future mcome On the other hand, careful and
skilful cultivation may gradually produce a permanent
improvement m the fertility of land Thus the amount
of produce obtained from the land, which forms much the
greatest proportion of the mcome of the country, depends
on the way m which the land is cultivated by the persons

LIMITATION OF RENTS BY LEGISLATION 283

who occupy it If those persons are trying merely to get
the largest possible immediate income, the production will
tend m time to dimmish , while m order to secure that the
production shall increase, it is necessary that each culti-
vator shall have a personal interest in maintaining and
improving the productiveness of the land in his possession

Now if there were no tenancy-legislation, a cultivator
would have no such personal interest Whatever happened
he could only hope just to make a living if he effected an
improvement in the productiveness of his land, he would
have to give up the whole of the extra produce as rent,
while if the productiveness declined he would be able to
get his rent reduced. And he could not be expected to
work for an improvement m the future, because he would
have no certainty that the land would remain in his posses-
sion ; it might at any time be given to someone else who
offered a higher rent than he was ready to pay. In these
conditions then the wisest course for the cultivator would
be to think only of the present, and get the largest crop
he could without regard to the future productiveness of
the soil In order to induce him to regard the future, he
must be given a reasonable prospect of keeping possession
of the land long enough to secure the increased produce,
and he must have the hope of keeping a share at least of
the increased produce for himself.

This conclusion has been drawn, not merely from the
theory of rent, but from the study of actual facts m
countries where the economic position resembles that of
India , and m all such countries it is recognised that m
order to maintain and increase the income which the
country, as a whole, obtains from land the cultivators must
be given a certain degree of Fixity of Tenure Fixity of
Tenure is the name given to the condition which has just

284 AN INTRODUCTION TO ECONOMICS

been indicated, when the cultivator has a reasonable
prospect of retaining his land for a sufficient penod to
make it worth his while to manage it so as to improve its
productiveness And in the same way it has been recog-
nised that the cultivator must not be made to pay more
than a Fair Rent This last expression is, of course, vague ;
the most definite meaning that can be given to it is to
regard a Fair Rent as a rent which leaves to the cultivator
a sufficient share of any mcrease m produce he may secure
to furnish him with an adequate motive for improving
the condition of his land Thus the object of Government
is to secure for the cultivator, firstly, Fixity of Tenure,
and, secondly, Fair Rents.

Am examination of the various Rent Laws or Tenancy
Laws m force in the different provinces of northern India
will show that, while the particular provisions vary from
province to province, these two elements, Fixity of Tenure
and Fair Rent, are to be found m all of them the protec-
tion given vanes in completeness, and does not always
extend to all cultivators, but m each case the object of the
law is to give the bulk of the cultivators more or less
fixity of tenure, and to limit the amount of rent which
the landholder can claim from them Thus m different
provinces we find * hereditary,’ or * occupancy,’ or * settled,’
or * statutory ’ cultivators , some of these are entitled to
hold their land for ever, provided they pay the rent and do
not injure the land, while others are entitled to hold it
for a minimum number of years And we find different
methods of limiting the amount of rent , m Oudh, for in-
stance, the enhancement is limited to a fixed proportion
(one anna in the rupee), while in Agra the occupancy
cultivator can have his rent settled by a court of law.
But the general principle is the same , landholders are

LIMITATION OF RENTS BY LEGISLATION 285

prevented from ejecting cultivators except on good grounds,
and the amount of rent which they can claim is limi ted
The study of Indian land-tenures is too large to be dealt
with fully at this early stage of a student’s course , but what
has been said above is sufficient to indicate that landholder
are not permitted to claim as rent the full share of the
produce which they could claim in the absence of restrictive
legislation It is thus not easy to state in a few words the
way in which the amount of rent is determined in India
at the present day. Now that markets for agricultural
land have come into existence, the conditions of supply
and demand are such as to enable rents to be raised not
merely to what wo have spoken of as the Economic Rent,
but to the point where the cultivator is left only the bare
necessaries of life But government interferes to prevent
this condition, and so far as its interference fa effective,
the result fa to leave the cultivators something more than
bare necessaries in the present, and (what is more im-
portant) the hope that they can improve their income by
improving the productiveness of their land. The cultiva-
tors then have an incentive to make the best use of their
land in the interest of the country as a whole ; and the
discussions that arise from time to time as to the sufficiency
of the tenancy law of a province are concerned funda-
mentally with the question whether or not this incentive
is adequate.

CHAPTER XXXIX,

GENERAL WAGES.

In the foregoing chapters we have indicated the extent to
which markets for Capital and for Land have come into
existence in India, and the nature of the processes by which
rates of interest and of rent are determined in them
We have now to consider Labour from the same pomt
of view. We shall begin with the case of general labour,
and refer later to the special conditions which affect
the remuneration of those occupations which require
specialised skill.

If we ask a cultivator living in an ordinary village
remote from a town how the wages he pays to labourers
are settled, there is very little doubt that he would reply
that it is entirely a matter of custom , that the field-
labourers have always received two sers of gram (or what-
ever the local rate may be) for each day on which they
worked, and that the carpenter and other artisans and
servants also get the remuneration that is customary
His answer would have been perfectly true not very long
ago, and is nearly true even now, because away from towns
the rates of wages are in fact largely customary, and the
customs regarding their amount do not change rapidly.
But as students of the subject we must go rather further,
because we know that customs are not everlasting, and that

GENERAL WAGES

287

they do, in fact, change ; we want to look back to the
tune before the custom was established, and so to find out
what were the causes of the rates which have become
customary ‘ Looking back * means studying the economio
history of the past. This stage in the economic history of
India is still very imperfectly known, but there is good
reason to think that the system of paying wages to labourers
must have arisen from a condition of slavery It is probable
that the ancestors of the men of low castes, who now form
the bulk of the village labourers, were at one time m the
position of slaves of the cultivators , that is to say, they
were not free to leave the village or to offer their work
to the employer who would pay the highest wages, but
they were bound to do their master’s work, and the share
of the produce which they received was determined by
their master’s will In these conditions there would
obviously be no ' market ’ for labour . 1 The chief economic
consideration that would affect the cultivator would be
the need of keeping his slaves ahve and at work , it would
upset his business, and possibly rum him, if the slaves
either died or got desperate and ran away into the jungles
at a time w r hen lus land was urgently in need of their work
To avoid such risks, he would have to give them enough
gram and other produce to keep them at work , the least
he must give would be what we have described as the
necessaries for existence, smee if he gave less than this
they would starve , and he would probably, m practice,
give a little more than this so as to keep them contented
At this period the slaves would have very few wants

1 A market for labour may exist where slavery prevails if the
Blavos are bought and sold like cattle , but there is no reason to
suppose that in India the village-labourers were bought and sold,
and transferred from place to place, as a regular practice

288 AN INTRODUCTION TO ECONOMICS

beyond a sufficiency of food, and while each village had
little communication with its neighbours, there would be
httle chance of many new wants arising When, therefore,
the cultivators had once learned by experience how much
produce must be given to keep their slaves ahvo and
content, things might continue without change for vory
many years , on the one hand, the same payments would
be made year after year, and they would become a matter
of custom , on the other hand, the slaves would go on
satisfying the same wants in the same way, and their lives
would ako be regulated almost entirely by custom The
customs would continue in force until changes from out-
side began to affect the life of the village , their origin w ould
be forgotten, and the people — whether cultivators or
labourers — would simply say that things had always
been so

As we have said above, the economic history of India is
not sufficiently known to justify a definite general statement
that the labourers were really slaves, and that wages began
in this way This is, however, the most probable con-
clusion from what is known , and perhaps the strongest
evidence of it is to be found m the fact that even now the
condition of the labourers in the more backward tracts
of the country is very like that of slaves They cannot,
of course, now be forced by law to work for their masters,
but as a matter of fact many of them do not think of doing
anything else, but take the customary wages, and hve in
the customary way , they are only gradually commg to
realise that they are free to go 'and work for whoever will
pay them best

It is probable then that m most villages the customary
rates of general wages were based originally on the amount
of commodities required to keep slaves ahve and reasonably

GENERAL WAGES

289

content m the way of life to which they were accustomed
There was then no labour-market m the villages, and even
now there are many villages where the influence of the
market is very little felt ; in the case of labour, as in that
of capital, we have to look to the cities and towns for the
development of the market A town is essentially a collec-
tion of a largo number of people engaged mainly in produc-
ing wealth, and labourers are needed to take part in the
production If now we consider the case of a town coming
into existence in what was previously an ordinary village,
we see that, as production develops, the producers will
want more labourers, and they must at first look to the
neighbouring villages for their supply But the labourers
in the villages are accustomed to their old life, and some
inducement must be offered to them to change it , the
obvious inducement is to offer somewhat higher wages than
those that are customary m the villages Thus the growth
of a town implies the beginnings of a market for Labour
There are now different employers, some in the town and
some in the villages, anxious to induce men to work for
them, and offering -wages as an inducement , the amount
of wages is no longer fixed entirely by custom, but it is
beginning to depend on the conditions of supply and
demand The demand consists of the employers, who want
men to work , and the supply consists of the labourers
in the neighbourhood

At first such markets would be very small and local,
but the gradual development on the one band of means of
communication, and on the other hand of knowledge and
intelligence among the labouring classes, would in time
produce the larger though stall imperfect market for labour
which exists to-day, and the main features of which have
been outlined in Chapter IX This market is, as we have

T

290 AN INTRODUCTION TO ECONOMICS

seen, stall very imperfect In a thoroughly-organised
market, -we should find the labourers all over India con-
stantly informed of the demand for work and of the n ages
offered in all parts of the country, and ready to start off
for any distant place nhere thero might bo a prospect of
earning higher wages ; as a matter of fact, only a small
proportion of the labourers think of moving at all, and most
of that small proportion think of going only to some
particular place whore they happen to know the condi-
tions We must not, therefore, expeot to find that the
rate of wages is determined so closely by the general
conditions of supply and demand as it Mould be m a
thoroughly organised market* Me find rather that the
markets for labour resemble the markets for agricultural
land In both cases thero are largo numbers of local
markets, within which the conditions of supply and demand
have a large influence in determining the rate, and these
markets are more or less connected M'lth each other, so that
each of them is influenced to some extent by the con-
ditions prevailing in its neighbourhood , but the connection
between the markets is by no means so close as that Minch
we found to exist in the markets for a commodity such as
wheat The essential difference between Labour and a
commodity such as wheat will be apparent when we say
that Labour may be regarded as a commodity with a null
of its ( own A sack of n heat has no choice m its disposal,
but is sent for consumption wherever its ouuier decides ;
but a umt of Labour is embodied m a living man, who
cannot be sent about the country in the same way, but
who decides for himself where he will go and what work
he will do The market for Labour is thus affected very
largely by the tastes and views of the labourer,^ and in
discussing the question of wages it is always necessary to

GENERAL WAGES

291

remember that -no are no longer dealing with inanimate
things, but with human beings whose nature is like our
own We shall return to this essential difference in the
follow mg chapters.

CHAPTER XL

GENERAL WAGES ( Continued ).

We have now to consider the working of tho markets for
labour, -which, as we have seen m the last ohapter, have
gradually come into existence in India , we have to
examine the nature of the demand for labour, and also of
the supply, and to see in what way equilibrium is secured
In the first place, however, it is necessary to settle the
meaning which we attach to the phrase Rate of Wages
We know that m an ordinary Indian town there is at
any time a prevailing rate of wages for general labour;
that is to say, if we engage an ordinary coolie for ordinary
work, we expect to pay him the prevailing rate of two
annas, or three annas, or whatever it may be at the tamo
In the same way there are prevailing rates in villages,
which may differ considerably from village to village
an ordinary labourer expects to receive for his day’s u ork
a fixed amount of money, or of gram, according to the rate
that is established m that particular village in which he
works The existence of a prevailing rate does not mean
that every labourer is paid precisely at that rate We
expect to pay a man more than the prevailing rate if he
does an exceptional amount of work, or does it excep-
tionally well, or works for longer hours than usual , and,
on the other hand, a man who is too weak to do a full day’s

GENERAL WAGES

293

'work, or -who works badly and carelessly, finds that he
cannot got employed at the usual rate, and has to work
for lower w ages But these cases are exceptional . m any
town or village thero is a standard of work and efficiency
recognised by tlio people, and the prevailing rate of wages
is paid to those labourers (the great majority) who work
in accordance with that standard.

At an earlier period m the history of India, it is prob-
able that the remuneration of labourers was given in
the form of commodities which would satisfy their wants
directly, and would not need to be exchanged for other
commodities ; , tho labourers received the food and cloth-
ing and fuel which they required, and were sheltered
at their employer’s expense This system has changed
gradually first, labourers were paid mainly m gram,
and though they consumed most of this as food, they had
to exchange part of it for clothing or other commodities ,
and then they were paid mainly m money, with which
they could buy tho food and other commodities that they
need But traces of the old system survive, and make it
necessary that, when we are considering the remuneration
of a particular class of labourers, we should be careful to
count up all that they really receive, and not limit our
attention to tho money that is paid. Thus, field-labourers
m some parts of the country commonly receive some dried
pulse ( chabena ) or some tobacco every day m addition to
the ordinary rate of gram or cash wages, and these items
must not be overlooked m calculating the remuneration
which they receive Again, as we saw m Chapter XXXII ,
the money paid to a groom in some parts of India is only
a part of the remuneration which he receives , he still
receives a quantity of commodities for consumption in
addition to his pay Such customs make it m some cases

294 AN INTRODUCTION TO ECONOMICS

difficult to state the total remuneration received by
labourers of particular classes
As soon as wages begin to bo paid m money, a distinction
arises between money wages and ical wages, winch must
be carefully borne m mind. The expression money wages
means simply the remuneration of the labourer stated m
terms of money , by real u ages w o mean the quantity of
commodities for consumption that tho remuneration
provides The labourer works in order to obtain com-
modities for consumption, and the important question for
him is the quantity of these commodities which he can got,
and not the number of coins which come into his possession
If we find that the rate of wages in a particular town has
nsen from two annas to three annas a day, it is obvious
that the rise m money wages has been at tho rate of fifty
per cent , but if we want to find out what the rise in
real wages has been, we must consider the prices of the
various commodities which the labourers consume, and see
what quantities of these they can purchase If prices have
not changed materially during the period which we are
considering, then the rise in real wages will be about the
same as that of money wages , the labourer can buy half
as much again when he has three annas to spend as when
he had only two If, on the other hand, prices of the
commodities which he consumes have risen by fifty per
cent , he is no better off than before , he has more money
to spend, but it will purchase only the same quantity of
commodities, and thus the amount of his real wages has
not changed Agam, if we find that the rate of wages in
a village has remained for a long time at two annas a day,
we must not conclude that the rate of real wages has not
altered in that time , we may find that the labourer has
to pay more than before for gram and salt and clothes

GENERAL WAGES 295

and other commodities, so that his real w ages have fallen
* w hile his money wages are unchanged.

It is by no means easy to find out accurately the changes
that have taken place in real w ages A detailed study of
the labourer's consumption has to be made so that we may
know what commodities to take mto account, and in what
quantities ; and though this is not difficult in the case of
a remote village w’here the labourer has few wants and
his habits change slowly, the difficulty becomes serious as
the number of wants increase, and as the means of satisfy-
ing them multiply The difficulty has to he faced when we
wish to study the economic progress of the people, because
their condition depends on the amount of real wages, and
not on money wages ; but for the present we will put it
aside by assuming that the prices of commodities do not
alter materially, and that a rise or fall m money wages
means a corresponding increase or decrease in the quantity
of commodities that a labourer can obtain We can then
speak of a rise or fall m the rate of wages, and for con-
venience we can speak of the change in terms of money ;
but wo must remember throughout that the important
thing to the labourer is not the amount of money he receives,
but the quantity of commodities which he can obtain

We will now look at the working of a market for Labour,
such as exists in an ordinary town in northern India,
and see how the prevailing rate of wages is determined
The Demand for labour comes from all the employers in
the town who want coolies to work for them , there are
probably several classes of employers — one or two factories,
the goods-station of the railw ay, merchants w ho have goods
to transport, contractors who are erectmg buildings or
repairing roads, residents who want coohes to pull punkahs,
or cut grass, or work in their gardens, and the like , and

296 AN INTRODUCTION TO ECONOMICS

the demands of all these classes taken together make up
the total demand m the market This demand is not 3
a fixed quantity, but varies with the rate of wages very
much in the same way as the demand for a commodity
varies with the price, that is, the general Law of Demand
apphes to labour as well as to commodities This idea
will probably be unfamiliar to students who have no
practical experience of employing labourers, and we muBt
examme it in a httle detail

When we considered the demand for a commodity, we
found that for each consumer there is an upper limit of
price, and that when the price reaches this limit he ceases
to consume that commodity In the case of labour, this
upper limit is determined by the amount of wealth which
the labour produces This is easy to see m simple cases
a man will not pay a coohe two annas to cut grass if the
grass is not worth two annas to him he will pay less than
the grass is worth to him if he can get the coohe to work
for less, but he will not pay more The same fact is true,
though it is not so easily seen, m cases of organised pro-
duction : where coohes are working with capital provided
by the producer, it is not easy at first sight to say how
much of the wealth produced is due to the coohes 5 work,
and how much to the capital , but it is a most important
part of the producer’s business to ascertam this, and to
make sure that every coohe whom he employs is at least
worth his wages No employer then will pay more for a
coohe than he t hi nks the coohe is worth Thus there is
an upper hmit to the Demand Schedule for labour.

There is also a lower limit, because the demand of each
employer can be completely satisfied Even if coohes were
willing to work for as httle as one pice daily, the number
that could find employment m the town would not be

GENERAL WAGES

297

unlimited, though it would bo largely increased, and there
is thus a Ion er limit to the Demand Schedule, correspond-
ing to the point m the case of a commodity u here every-
one can satisfy his nant completely Between these two
limits the number of coolies demanded vanes with the
prevailing rate of wages, increasing when the rate falls
and decreasing when it rises, precisely m the same way as
the demand for a commodity vanes with the price Even
in ordinary household affairs, a man has to consider the
rate of it ages nhen deciding how many coolies he can
employ to cut grass or work m his garden, and if he finds
that the rate has risen he has sometimes to reduce the
number employed, and leave undone work that would
have been done if wages were lower. In the same way
cultivators have constantly to consider whether or not to
lure a few labourers for a day or two, and a difference of
even a couple of pice m the rate of wages may decide
whether the labourers shall be employed or not Con-
tractors, again, who employ large numbers of coolies,
have to pay the closest attention to the rate of wages
if the rate falls they employ more coolies, and get their
work done quickly, while if it rises they reduce the number
of coolies, and spread the work over a longer period.
Where production is organised on a large scale, and much
capital is employed, the rate of wages is not less important
Some of the most difficult problems that a producer has to
decide arise from the possibility of substituting machinery
for manual labour ; he has to compare the interest and
depreciation that must be charged on the machines with
the wages that would have to be paid if the work were
done by hand Where wages are low, he will employ large
numbers of coobes in such work as moving materials and
finished goods from place to place by hand , when wages

298 AN INTRODUCTION TO ECONOMICS

nse, he may find it advisable to set up new machinery,
and thereby reduce the number of coohes

All classes of employers then are inclined to reduce the
number of coohes when the rate of wages rises , and in a
town of any size it is reasonably certain that, whatever the
rate of wages may be, there are some employers who are
in doubt as to the exact number of coohes they can profit-
ably employ Even a very small change in the rate will
cause these hesitating employers to decide m one way or
the other , a shght rise will reduce the demand, and a
shght fall will increase it The demand for labour m the
market of an ordinary town can thus be represented by
a schedule similar to the Demand Schedule for a commodity,
and following the general Law of Demand, that a rise
in wages will reduce the demand and a fall m wages will
increase it

Before leaving the consideration of the Demand for
labour, attention should be directed to the fact, which is
of very great practical importance, that the upper limit
of the Demand Schedule depends on the Efficiency of the
labourers in the market The nature of efficiency has been
discussed in Chapter X , where we have seen that the amount
of wealth produced by labour vanes greatly in accordance
with the quality of the labour employed , the upper limit
of wages depends on the value of the work done, and
consequently, on the efficiency of the labourers employed
This fact is well known to employers contractors, for
instance, know that they can pay higher wages for earth-
work to labourers from Oudh than to labourers from
Central India, because the former do more, and better,
work than the latter , and where large buildings are under
construction it is sometimes worth while to bring Sikh
carpenters from the Punjab, or Chinese carpenters from

GENERAL WAGES 299

Calcutta, the SiUis and Chinese got much higher wages
than ordinary Indian carpenters, but they are worth their
wages, because they are more efficient and do better work
Labourers can never go on earning more than their work
is « orth to employers, but an increase of efficiency, which
increases the north of their work, can also lead to a rise
m the rate of w ages

CHAPTER XLI.

GENERAL WAGES ( Continued )

When we turn to consider the Supply of labour in the
market, we have a more complex problem before us
than that of the supply of a commodity The supply of
labour on a particular day consists of the labourers who
are present, and able and willing to work Their object
in working is, as we have seen, to obtain commodities for
consumption , an increase m wages means (on the assump-
tion which we have made that prices do not change materi-
ally) an offer of a larger quantity of commodities, and this
tends to increase the supply of labour by inducing people
to work who are hesitating whether the remuneration
offered is sufficient So far then the position is similar
to that of a commodity, where a nse in price results in an
increase of the supply offered for sale , but the working
of this tendency is complicated m various ways owing to
the facts, on which we have already laid stress, that the
labourer has a will of his own, and that his life is largely
a matter of custom and habit
In the first place, we must remember that the labourer
cannot be separated from his work 1 The destination of a
commodity such as a sack of wheat ''makes no difference
to the seller, who is satisfied when he has parted with it
and received its price , it makes a very great difference to

GENERAL WAGES 301

the labourer •where he has to go, and under what condi-
tions he has to do his work, and the offer of higher wages
may be insufficient inducement for men whose habits of
life are not easily changed Thus it is a matter of common
knowledge that wages may be considerably higher in an
Indian town than in villages a few miles distant , this
difference could not continue to exist if labour were just hkft
a commodity, because the labourers would leave the villages,
reducmg the supply there and go to increase the supply
in the town Some labourers do, in fact, go to the towns,
but by no means so many as the employers in the
towns would like ; the reason is that the conditions under
which they have to live and work in a town are less attrac-
tive to them than those which prevail in the villages. A
village-labourer usually has a house of his own with some
open ground near it, where he and his family can live in
the way to which they are accustomed ; if he goes to a
town, he has to rent a house or a room in a crowded lane,
with probably no place where he can sleep in comfort on
hot nights, and with many other discomforts, and his whole
way of life has to be changed Then the conditions of his
work in a factory are unpleasant ; he cannot always rest
when he is tired, or stop work to smoke or drink water
as he usually could m his village : and he may have to
work under harsh overseers, and alongside of strangers of
other castes, instead of passing his time in the society of his
friends and relatives Considerations of this sort affect
very strongly the view of the village-labourers in northern
India, and a large proportion of them prefer two annas a
day in their village to three, or even four, annas in the city
This point — the effect on the supply of labour of the
attractions and drawbacks of particular forms of employ-
ment — is by no means peculiar to India, but has been

302 AN INTRODUCTION TO ECONOMICS

noticed by writers on Economics in most countries The
views of different races may differ considerably as to what
constitutes an attraction, and as to the senousness of
particular drawbacks thus, while Indian employers com-
plain that even higher wages will not draw labourers to
the cities, in some countries the complaint is that all the
best men go to the towns, and that the towns are over-
crowded, while there are not enough labourers to do the
work of the country but the fact remains that to the
men of any particular race some forms of employment are
more attractive than others, and they will work for lower
wages at those which they prefer in other ways The
supply of labour in a particular market, or for work of a
particular kind, is thus not merely a question of the wages
that can be earned the labourer thinks of the amount
of wages, but he also thinks of all the other advantages
and drawbacks incidental to the employment, and he
chooses that which, taking everything into consideration,
he considers the best Economists speak of Net Advantages
when they are comparing one form of employment with
another the idea underlying this expression is that a
labourer can reckon up on one side all the advantages
(including the wages) of a particular kind of work, and on
the other side all its drawbacks, and then deduct the
drawbacks from the advantages , when he has done this,
he can compare the net advantages of one form of employ-
ment with another, and he will choose that form of which
the net advantages are the greatest Such a calculation
cannot be made exactly, because it is not possible to
compare directly with each other such things as differences
in climate, the conditions of work, the social life, and so
on , but the idea makes it easy for us to see what the
labourer more or less unconsciously tries to do. He wants

GENERAL WAGES

303

to choose the pleasantest hfe for himself a^d Ins family,
and he compares the conditions of different ways of living
as well a3 he can. A difference in the amount of wages will
mfluenco his decision, and he may choose a form of employ-
ment with many drawbacks because he thinks the extra
wages obtainable in it will more than counterbalance these ,
but what he looks at is the conditions of the employment
as a whole, and not merely the w ages obtainable
\A second cause that may affect the Supply is the impos-
sibility of storing labour. A merchant can in nearly all
cases store his stock of commodities if he thinks the prices
are too low, they will be as fit for consumption some months
hence as they are to-day. But if a labourer does no work on
any day, that day is lost , he cannot offer two days* work
on the next day In selling his labour he is thus in the
position of a merchant whose stock of goods must be sold on
the day that it is offered, or it becomes worthless — as worth-
less as a stock of fish that has lam on a market-stall during
a night in May It may be worth the while of a body of
labourers to refuse to w ork for wages which they think are
too low, in the hope that employers will offer more , action
of this kind, which is called ' striking,’ is very common in
many countries, and is by no means unknown in some
industries in India , but in order to strike effectively,
labourers must have the means to feed themselves and their
families dunng the period of idleness, and where labourers
have no resources, but spend their wages as they earn them
day by day, refusal to work means starvation The
ordinary labourer then is rarely m a position to withhold
the offer of his labour for more than a day or two, while
many employers can, as a rule, wait longer than that, and
iconsequently the labourer’s position in bargaining for
wages is weaker than that of the employer, and labourers

304 AN INTRODUCTION TO ECONOMICS

have often to work for less wages than they could get if
they were in a position to withdraw their labour from the
market, that is, to reduce the Supply, for a period long
enough to induce employers to offer higher w ages Students
will find later on that in western countries this question
has become of great practical importance, and they will
have to devote much attention to the way in which workmen
combine to form what are called Trade Unions, one of the
mam objects of which is to enable workmen to bargam
with employers on more nearly equal terms, by providing
them with the means of living during a strike , and there
is httle doubt that the question will become important
throughout India also if the system of factory-production
extends as it appears likely to do But for the present
the ordinary labourer has neither the intelligence to know
when it would be wise to withhold his labour, nor the
resources required to enable him to do so , and, con-
sequently, he has often to work for less than the wages
which the state of the market would otherwise enable him
to claim

Next, we must consider the effect on the supply of labour
of what we have called efficiency. One maund of wheat is
just as useful a commodity as any other maund of the same
kind , it will give the same number of satisfjnng meals
But one labourer is not just as useful as any other labourer ;
his usefulness to his employer depends on the amount and
quality of the work which he performs An increase in
efficiency, such that three men can do the work that
previously required four men, would produce the same
effect on the supply of labour as an increase of one-third
m the number of labourers This consideration is im-
portant when we are considering changes in the supply of
labour during a long period of time, but it does not affect

GENERAL WAGES

305

the equilibrium in the market in a short period, because
sudden changes in efficiency do not occur , a large change
can result only from careful training and the development
of the moral qualities, and these processes come about
slowly and not suddenly

Another important consideration is the length of time ’
requrrod to increase the supply of labour through the
growth of population When the market-pnee of a com-
modity rises, producers set to work to mcrease the supply ,
the time required for this process varies greatly, from the
few days or weeks that a factory requires to produce
increased supplies of commodities like yam, to the period
of some months required to sow and reap a larger area
of wheat , but in any case it is much shorter than the
pcnod required for children to be bom and grow to the age
at w'hich they can work as labourers Thus the supply of
labour cannot be affected rapidly by the growth of popula-
tion On the other hand, it may be affected in a very
short period by the decrease of population resulting from
plague or some other epidemic As a rule, however, rapid
changes in the number of labourers m a market result
from migration rather than from changes m the birth-
rate or death-rate The subject of migration has been
discussed in Chapter IX , and we have seen that the
process is becoming more and more important in India,
though the obstacles are still very great , there are, how-
ever, grounds for concluding that as time goes on the
adjustment of the supply of labour will be affected more
and more rapidly by means of migration, though the
adjustment is never likely to be so rapid as is seen in the
case of a commodity.

We have not yet given a complete account of the special
features that exist in regard to the supply of labour, and

306 AN INTRODUCTION TO ECONOMICS

the subject will require the attention of students at a
later stage , but enough has perhaps been said to make
it plam that the working of the labour-markets is by no
means so rapid as that of the markets for commodities.
The demand for labour decreases as the rate of wages
nses, and there is a tendency for the supply to increase
in the same circumstances, so that the tendency to produce
equilibrium exists — that is to say, the market-rate of
wages tends to settle at the rate where the supply is equal
to the demand , but the supply is, as we have seen, affected
by various other causes, and so does not vary directly with
the wages offered, and, consequently, the adjustment is
imperfect The result is that in an ordinary Indian market
the rate, when once settled, is slow to change employers
get accustomed to paying a certain sum, and labourers
get accustomed to woik for that sum, and the rate is not
affected at once by small changes in the demand or in the
supply, so much so that a slight knowledge of the market
m times when such changes are not large may lead to the
hasty conclusion that demand and supply do not affect the
rates at all

This conclusion would, however, be wrong, as is seen
when the changes are large We know, as a matter of fact,
that a widespread epidemic of fever will raise wages for
the time bemg, because the supply of labourers able to
work is largely reduced , the men are stall present within
the hunts of the market, but they are not able to work,
bo their work is not on offer m the market A severe
outbreak of cholera or plague may equally reduce the
supply of labour, because many labourers run away , but
the demand usually falls at the same tune because many
employers run away too, and, consequently, the effect on
the rate of wages cannot be foretold with the same degree

GENERAL WAGES

307

of certainty. The effect of a very bad harvest is usually
to lower wages in towns, becauso employers who depend
largely on the harvests for their incomes have little money
to spend, and the high prices of food leave them less than
usual to spend in other Mays ; and Mhile the demand for
labour falls, tho supply nses becauso labourers who cannot
find work in tho villages come to look for work m the town
A large pubhc work again, such os the making of a railway
or canal, always tends to raise Mages in the neighbourhood,
becauso it requires a very large number of coolies, or, in
other words, increases tho demand for labour These
examples are sufficient to show that, as a matter of fact,
the market rate of wages is affected in the same way as
tho market price of commodities by changes m supp y an
demand, provided that these changes are of considerable
amount relatively to the size of the market
We find too that w hen temporary ^ uc ^ ua ^° ns
come into operation to bring wages back to th ®
of the place and time, just as market-prices of commodiries

tend to return to the normal level When wag^ the
demand for labour falls off and the supply tends to m
crease, Mkile nhen wages fall the demand uses «*«*■
supply is reduced, so that in either case the rate tends to
rctom to the normal after each fluctuation In the case

of commodities, wo found that 6 ’ of P p rodu ction,

tune depends on what m*o call t xp
becauso producers roll not go on produemg *“
this amount, while if they receive more the m the

„iU be increased untd the price is

ease of labour, the normal rate of ^ femiIjr

the amoiuit that mil maintam , jf -wa.es iall

in the nay of Mo to nhieb the

largely below this pomt for any gt

308 AN INTRODUCTION TO ECONOMICS

supply of labour may be reduced by labourers deciding
not to -work, and perhaps leaving the market and going
to work elsewhere , while 1 f wages remain much abovo this
point, labourers who were hesitating will dccido to work,
and perhaps men will como to tho market from elsewhere,
and so tho supply will bo increased Changes such as these
will not, however, tako placo rapidly in the conditions
which exist in India , and it is always possible that, in*
stead of such an adjustment, tho labourers may change
their customary way of lifo, that is that the normal rate of
wages may change

The w-ay of life to which labourers of any grade are
accustomed is usually spoken of as their Standard of
Comfort It is easy to recognise tho Standard of Comfort
prevailing at any time and placo, and also to see that it
vanes from time to tuno and from placo to place We
know by expcnence that most of tho labourers in a par-
ticular town, or in tho villages of a district, live in houses
of the same kind , that they wear the same sort of clothes ,
and that they eat about the same amount of food of tho
same land But if we compare the labourers of Benares
with those of Delhi, or the labourers in a Bihar distnot
with those of a district in the Panjab, we see at once that
the latter have a distinctly higher standard of comfort ;
they eat a larger quantity of more nourishing food, they
wear better clothes, and they have usually more money
to spend on small luxunes or amusements This Standard
of Comfort, then, is a thing that really exists, and that w'e
can recognise If bad times come, when there is little
work to be had and labourers are not able to earn as much
as usual, they cannot, of course, maintain their standard
of comfort , they must eat less, and have to put up with
inferior food, and they must wear less clothing, and make

GENERAL WAGES

309

their old clothes last longer , but when the conditions of
employment improve, they return as soon as possible to
their former way of living

But, as we have indicated above, the Standard of Com-
fort may change, just as changes must be expected in the
expenses of production of a commodity The habits and
customs of the people change slowly, but they do change,
and the rate at which they change m India is increasing
A rise in swages may last long enough -for the labourers
to get accustomed to a better way of living, for instance,
to consuming wheat instead of the coarser grains , and
when their Standard of Comfort has thus been altered
they are not likely to give up wheat as long as they can
get it On the other hand, a fall in wages may last long
enough for the labourers to get accustomed to a reduced
amount of food, and then their Standard of Comfort will
have been altered for the worse In the next chapter we
shall consider further this question of changes m the
Standard of Comfort and m the normal rate of wages.

CHAPTER XLH

GENERAL WAGES ( Continued )

We must now consider the subject of changes in tho norma!
rate of -wages Tho normal rato m a market is determined
at any tune, as no have seen, by the conditions of supply
and demand in such a way that tho labourers as a whole can
just maintain their existing standard of comfort , but this
standard of comfort is itself liable to change, and in India
changes are hkely to occur more rapidly in the future than
has hitherto been tho case We have seen m Chapter
XXXIX that the rates of wages in villages remote from
towns might remain unchanged for a long time, because tho
customs of the people, which mako up the standard of
comfort, might then be very slow to change , what we have
described in that chapter as the customary rate — the
amount required to keep the labourers ahve and content —
is in fact the normal rate in those conditions, and just
enables the standard of comfort to be maintained But
our study of Consumption has shown us that the customs
of Indian hfe are changing more rapidly than was formerly
the case, and those changes must affect the normal rate
of w'ages A more complete study of the conditions of
normal equilibrium in a market is required before any thing
hke a complete account of the theory of changes in normal
wages can be given , but the practical importance of the

GENERAL WAGES

311

subject is so great that we must attempt to indicate by

examples the nature of the changes that may occur, and

their ultimate effect on the economic condition of the

f

country. „ ,

In most parts of northern India at the present

time, we see that the ordinary labourers have what we
must admit to be a very low standard of comfort they
get enough food for existence, but they wou e
efficient labourers if they could get more nourishing food,
while their supply of clothing, and their house-accom-
modation are generally insufficient for the proper mam-
tenance of health They can spend little or
training their children for work, and they cannot as
rule, save up money to support themselves m sickness
or 4en they are too old to labour The* wagas , arelow
and the* efficiency as workmen * also low Wha wdl £
the result on such labourers of a eons.derable nse m the

wages which they earn 7 nbaerved

Writers who base their conclusions on questl0 n

in Europe and America say that the

depends on the way Iead s° to increased

and they distinguish expenditur reduce it

efficiency of labour from that winch

laving m India, we have to colder anottoc^c w ^

has not hitherto presented i e m ean less time

because we find that higher wages may mem less

, v w e -rwiH take these cases one y

spent in work, we win ^ wages rise.

In the first place we may suppos. that thar

the labourers hve and wor m e j, mptlon

increased earnings on m the se will,

of mtomoatmg drugs Co ^ th(J efficiency of the

'“ kOT ' ond '

312 AN EsTR ODUCTION TO ECONOMICS

■wtat is more important, the moral qualities which (as we
have seen in Chapter X.) affect efficiency so largely -will
be gradually destroyed. The rise in wages will then he
lost * employers wilt find that the work of the deteriorated
labourers is worth less to them than, formerly, and will
offer less for it. Bat it is most unlikely that men who have
formed the habit of using such drugs will give them up
when their income is reduced ; they are much more likely
to go on using drugs and reduce their expenditure in
other ways This means that their standard of comfort,
which is also the standard of their wages, will fall; this
means further loss of efficiency, and this in turn means
a farther loss of wages ; and so things will go from bad
to worse. But this is not alL As the standard of comfort
falls, the labourers’ children will suffer more and more
from insufficient food and clothing ; when the time comes
for them to work, they will be weaker, and therefore less
efficient, than their fathers were at the same age ; and if
(as is very likely) they Ieam from their fathers the habit
of using drugs, the progressive deterioration will go on
throughout the second generation, and the final result will
be a degraded and inefficient population, naming barely
enough to keep themselves ahve. So far we have assumed
that the population wiH not change materially in numbers
If it increases, the progressive fall in wages will go on
more rapidly, because there will be a larger number of
inefficient labourers looking for work. If it decreases, the
mil in wages will be retarded because there will be fewer
of them ; but wages must continue to fall so long as effici-
ency continues to decrease.

This is an extreme illustration : we have chosen it so
a= to show as clearly as possible the result of a loss of
efficiency among labourers The cause of the loss of

GENERAL WAGES

efficiency is for our present purpose immaterial ; the pi
is that when efficiency is reduced by any cause, the rec
tion is likely to be progressive loss of efficiency me
loss of wages, and loss of wages means further loss
efficiency, and the process of deterioration can be stop
only by a change m the habits (whatever they may
that cause the inefficiency

Now let us contrast with this the case of a labourer i
spends Ins increased earnings in such a way as to mere
his efficiency. At first the extra money will go to impr
the food and clothing of the labourer and his family , i
better food and clothing will make him a more offici
labourer, and enable lnm to secure a further mcrease
Ins mcome Then he will be able to live m a better hoi
to spend something on training his children, and perhi
save up some money to support him m old age We n
safely beheve that as his wages rise, he will — so long as
spends them wisely — become a better man m every wi
The children of such a man will start life with much grea
advantages than their father enjoyed , better fed and bet
clothed, they will be stronger and healthier, and they v
be trained for work of a higher class than their father wc
while the moral qualities that make for efficiency will ha
had the best chance of developmg ;m a home govern
by a man of this type In this case we have exactly t
opposite result to that which we have just consider©
the improvement m position is likely to be progress ! 1
because each mcrease m earnings is so spent as to sees
greater efficiency, and each mcrease in efficiency is like
to secure a further rise m wages

In this case too we must allow for possible changes
the n umb ers of the population If the numbers fall, t'
process of improvement will be accelerated, because the

314 AN INTRODUCTION TO ECONOMICS

will be fewer labourers looldng for work, while if the numbers
nse it will bo retarded. But we must remember that if
(as we suppose) the labourers generally are improving their
position and increasing both in thrift and in productive
power, the children of some of them are likely to nse to
the higher grades of labour, and will no longer compete for
the employment which wo have described as general
labour And we must also allow for the fact that labourers
of this type are not likely to bring up a larger number of
children than they can hope to provide with a favourable
start m life , the population will in this case bo limited
by the prudence of its adult members, and the conditions
to which Malthus looked forward {vide Chapter .VIII )
will be to some extent realised in practice In the case
then which we are considering, the increase in the number
of labourers is not likely to be so great as to prevent the
progressive improvement resulting from a progressive
increase in efficiency

^Looking, then, at the labouring classes of northern
..✓India as we see them to-day, we might say that a nse in
their wages, if it lasts long enough to give time for a change
m their habits, may have one of tw r o results. If the in-
creased income is so spent as to secure greater efficiency
on the part of the labourers, then a progressive improve-
ment is hkely to follow in their position, and there is no
reason why, m the course of a few generations, the bulk
of them should not enjoy all the requirements of a reason-
able life If the mcreased income is wasted, and its expen-
diture leads to a loss of efficiency, then a progressive
deterioration must be expected until the labourers are
living on the barest necessaries of life But we have still
to take account of a third possibility
In the previous Book we had to recognise the possibility

GENERAL WAGES

315

that, w the artisan-stage of production, the supply
of a commodity would decrease as its price rose, because
the artisans would do less work. In the same way it is
possible that the supply of labour will fall off as wages rise
This possibility has not usually received serious considera-
tion in most countries, but it has to be reckoned with m
India : it is a common complaint of employers that when
they pay higher wages their men work on fewer days in
the week, and there is undoubtedly a certain amount of
truth in the complaint Habits and customs, as we have
seen, change slowly in India ; and it may well be the case
that labourers will not increase their expenditure, but will
be content to go on earihng the same income as before ,
and if they can earn it by four days’ work instead of six,
they will only work for four days and spend the other days
in idleness Let us suppose that labourers generally
adopt this attitude, and let us also suppose that their
total number does not vary greatly, and that their efficiency
is not affected by the fact that they spend a much larger
portion of their time in idleness 1 The immediate result
is that the supply of labour is reduced by one-third of its
whole amount , and if it were not for the facts which are
embodied in the Law of Demand, wages might rise to an
infinitely greater figure, because each nse in wages would
reduce the supply, and each reduction m the supply would
result in a further rise m wages. But, as we know, em-
ployers wall not pay more than the labour is worth to them ;
if they find that raising wages diminishes the supply of

1 Their efficiency might bo reduced if the habit of -working steadily
while at work should be weakened by the change , they would then
do loss work than before even on their working days It might on
the other hand he increased if (which is not likely) working every
day puts an excessive strain on their muscles or on their nervous
system, for then they would do better work after each day of rest.

316 AN INTRODUCTION TO ECONOMICS

labour, they will not go on raising wages, but they will
organise then production so as to employ as httle labour
as possible, and they will refrain from extending then
production or from undertaking new industries because
of the difficulty of getting sufficient labour at wages which
they can afford to pay Thus the final result may be that
the condition of the labourers is unchanged , they mamtam
then standard of comfort, and neither advance nor deterio-
rate But the production of wealth m the country may be
seriously affected by the inadequacy of the supply of
labour, so that the choice of leisure (or idleness) on the
part of the labourers will prevent not only then own
progress but the economic progress of the country as a
whole

- We have now indicated three ways m which the position
of the labouring classes may be affected by a nse m the
rate of wages. Human nature being what it is, it is not
likely that all the labourers of any country will behave
in the same way Some will become more efficient, some
will become less efficient, and some will not change , so
that the three tendencies will be all at work at the same
time There will always be some labourers increasing m
efficiency and bringing up their children to be better
labourers than themselves , there will be others decreasing
in efficiency and bringing up children who will be worse
workers than their fathers , and there will be others agam
whose efficiency does not change and whose children will
be neither better nor worse And the same individuals
will not always remain in the same class Men who have
failed to make a living as cultivators or as artisans will
become ordinary labourers, while ordinary labourers may
become cultivators, or acquire sufficient skill to rise to
a higher grade of employment. The final result for the

GENERAL WAGES

317

country will depend, in the long run, on the balance of
these various forces the position of the labouring classes
will gradually improve if their efficiency on the whole
increases, and it will deteriorate if their efficiency on the
whole declines In no case can they continue for long to
get more wages than their work is w orth, and the amount
of their wages must depend very largely on their efficiency,
that is, on the quantity and the quality of the work they do *
In a first approach to the study of Economics it is pos-
sible only to take a very general view of the action of the
various causes that are at work, and students will find that
this question of the causes affecting the rate of wages
is even more complicated than the foregoing account
would suggest But before leaving the subject a few
words must still be said regarding the influence that is
exerted by the character of the labourers’ wives In most
households the wife takes a very large part in regulating
the way m which the income is spent, and it rests very
largely with her to determine whether the expenditure
makes for increased efficiency or the reverse. And her
influence over the children is probably of even greater
importance in the long run, because their moral character
depends on their mother’s training more than on any other
single cause The future of the working classes depends
therefore very largely on the character of their wives and
mothers , and if for a moment we look beyond the limits
of our science, and consider what steps can be taken to
give the working classes the best chance of improving their
position, we must recognise that the result must be sought
by influencing not so much the adult labourers themselves
as the women who have so large a share in controlling the
expenditure of their wages, and in training the next genera-
tion of woikers

CHAPTER XLm.

EARNINGS OF SPECIALISED OCCUPATIONS

We turn now to consider the earnings of all those classes
who receive wages, of pay , or salaries, or fees, or whatever
the ftn.minga may be called, in return for doing work that
requires a greater of less degree of speciahsed skill, as
distinguished from the work that can be done by a general
labourer. These classes are numerous , there are engino-
dnvers and mechanics of various grades, workmen carrying
out particular processes m factories, clerks, and officials
of all ranks, doctors and pleaders, engineers and archi-
tects, and so on The amount of specialised skill required
may vary greatly from class to class, but in all cases a longer
or shorter period of training is required to fit a youth for
the particular occupation which he is gomg to follow
In all these cases the principles hold good that the earnings
are determined by the conditions of Demand and Supply,
that at any time the earnings of each class tend to be equal
to some normal rate, and that the normal rate of earnings
of each class alters With the progress made in the develop-
ment of the country There are, however, several points
of importance which may have a marked effect on the
Demand, or on the Supply, of men of a particular class,
and may consequently affect the earnings of that class

The market for employees of any particular class differs

EARNINGS OF SPECIALISED OCCUPATIONS 319

in some respects from that for general labour. As we have
seen in Chapter XI. there is often a greater degree of
mobility among these classes than is the case with general
labour, so that in this sense the market is more extensive .
employers look for men with particular qualifications not
merely in their own town but all over India, or even
outside its limits, and a large factory in northern India
may be found to employ men from many different places —
perhaps a few Europeans at the head of its different
branches, Parsi mechanics, Bengah clerks, and so on
But in another sense the market is more limited, because
the number of men wanted in any class, and also the number
available in that class, is very much smaller than the
number of general labourers The market is thus more
restricted, and bargaining is not so easily done as in the
case of ordinary commodities, or even of general labourers ;
but, at the same time, the employers of many of these
classes make it their business to study very carefully the
rates of earnings and the state of supply and demand,
and they know very well the rate at which they can expect
to get a man of any particular qualifications And, in the
same way, the employees, especially in the higher grades,
study closely the same facts, so that m practice the rates
are settled almost entirely on a consideration of the number
wanted and the number available m the particular class
The number wanted, or the Demand, depends partly
on the natural resources of the country and partly on the
state of development which production has reached The
natural resources are important, because they decide the
type of industry that is carried on . thus there can be no
demand for coal-miners in countries where coal does not
exist But the state of development is also of great im-
portance : there will be no demand for engme-dnveis in

320 AN INTRODUCTION TO ECONOMICS

a country where production has not got beyond the artisan-
stage, and where all work is done by hand , and the demand
will increase as producers extend the use of machinery.
Thus as a country progresses, the demand for men pos-
sessed of special skill is likely to mcrease, and the demand
for general labourers is hkely to become relatively less
important

The Supply in each class is limited in particular by
two causes One of these is the influence of caste A
particular kind of work which, under existing social con-
ditions, can be done only by the men of a Bingle caste,
may at any time, through changes in the orgamsation
of production, become very important, and a large demand
may arise for workmen who are able to do it. But the
supply is strictly limited by the number of men in the
caste, and if this is small relatively to the demand, the
conditions are Buch that the men may earn very high
wages, and continue to earn them for a considerable time
The establishment of a large leather industry, for instance,
means a greatly increased demand for workmen of the
caste or castes that will handle different lands of skins,
and if such men are scarce, they may earn very high wages ;
but in tune it is probable that men of other castes, or of
other religions, will become w illing to do the work, and
then the increased supply of workmen will tend to bnng
wages down from their abnormal level
The second pomt is the need of special training before
men can make a living m one of these occupations The
amount of such training, of course, differs very greatly
in different occupations The son of an ordinary labourer
can learn how to manage a simple oil-engine in the course
of a very few months, while it takes years to tram a mechanic
of one of the higher grades, or a professional man such as

EARNINGS OF SPECIALISED OCCUPATIONS 321

a pleader or an engineer. In some cases adults can enter
one of these occupations, but, as a rule, the mam source
of supply consists of those for whom the occupation or
the profession has been chosen ■while they are quite young
The supply at any given time is not, therefore, determined
merely by facts in existence at that tune, but is very
largely the result of the decisions made by a large number
of parents many years before Students probably know
from personal experience how much care and thought
parents in the official and professional classes devote to
choosmg occupations for their sons , and as production
becomes more highly organised the same question begins
to trouble skilled workmen of all classes. In making the
decision, parents look at many points besides the income
that may be expected to be earned , in fact, they do their
best to compare what we have spoken of as the Net Advan-
tages of each of the occupations that appear to be within
their reach. Students are probably familiar with the
comparisons drawn at such times between different branches
of the pubhc service ; the rate of pay is, of course, im-
portant, but the conditions of service m regard to pension
and similar matters are also closely scrutinised , the
chances of rising to the highest grade, and securing one
of the prizes of the service, are taken into account , and
the social position is by no means neglected And when
the organisation of production has developed, precisely
similar questions have to be settled by engine-drivers,
or mechanics, or foremen m factories, or other skilled
v orkmen , they have a choice of various occupations for
their sons, and they compare the net advantages of each
(and not merely the pay), and choose that of which the
net advantages appear to them to be greatest
The result of this process should be to equalise the net

x

322 AN INTRODUCTION TO ECONOMICS

advantages of occupations m tho same grade, because if
parents choose that occupation which offers tho greatest
net advantages, tho supply in that occupation will bo
increased, and its earnings will consequently fall, while
occupations which offer tho smallest net advantages will
be chosen by few parents, tho supply in them will fall off,
and the earnings must consequently rise This tendency
does in fact exist, and its results are important , but tho
equalisation of net advantages is very rarely completely
realised The chief reason for this fact is that parents are
quite unable to forecast tho demand for men m different
occupations during tho thirty years or so that their children
must bo expected to work Changes m production may
at any time cause a largo sudden demand for employees of
a particular class, and may make tho skill of employees of
other classes practically useless, and tlicso things cannot
be foreseen Parents, especially Indian parents, look very
much to the present position, and do not make sufficient
allowance for possible changes , and hence wo find that; tho
competition for old-established professions or occupations
is exceedingly keen, and tho rato of earnings in them is
lowered, while it is sometimes very hard to find men
qualified to work in occupations or professions of moro
recent establishment, and tho earnings in these are rela-
tively high While, therefore, tho tendency to equahso
net advantages exists, tho time required to adjust tho
supply, and the difficulty of foreseeing the future, make
exact equalisation almost impossible ; and at any moment
some professions and occupations are overcrowded and
their earnings depressed, while the supply in others is
inadequate and the earnings abnormally high
A few examples will make it easier for students to under-
stand what has been said on this point First, let us look

EARNINGS OF SPECIALISED OCCUPATIONS 323

ftfc tho caso of clerks ablo to copy English •writing. When
the English administration was established m India, the
proportion of tho population that could read and wnte
was much smaller than it is now, and naturally scarcely
anyone know English, because tho language m official use
had hitherto been mainly Persian. When then a demand
aroso for English copyosts, very few could at first bo found,
and those who existed wore able to earn large salaries
But parents very soon recognised that in the new condi-
tions a knowledge of English would be an important
qualification for an official career ; and as more and more
boys were taught English, the supply of men able to copy
English increased rapidly, and the salary offered for such
work fell, until now a man who can merely copy earns no
more than many domestio servants. In the same way
when typewriters were first introduced there were few
clerks who knew how to use them, and people who wanted
their work typewritten paid considerably more for this
than if it had been copied by hand Typewriting, however,
is an occupation m which the supply can be increased
very quickly, because a copyist can learn the art in a
month or so, and consequently the deficiency in supply
was rapidly made good, and now typists cannot earn much
more than copyists ; if they want to increase them income
they have to acquire the much more difficult art of writing
shorthand.

Again, wo may take the case of drivers of motor-cars
It is only a few years since motor-cars were introduced into
India, and naturally there were no trained drivers in the
country, because parents could not have foreseen some
years before that the occupation was going to come into
existence, nor if they had foreseen it could they have
found anyone in India qualified to tram their sons. The

324 AN INTRODUCTION TO ECONOMICS

first owners of motor-cars had therefore to engage European
drivers on very high salaries But it does not take very
long to tram a mechanic to he a competent driver, and
very soon Indian mechanics began to be trained because
they saw they could earn much more as drivers than as
mechanics, though they could not get such large salaries
as the European drivers At first they had difficulty in
getting the necessary training, but in a short time training
classes were established m various parts of India, and now
the supply of drivers is about keeping pace with the demand,
that is to say, drivers earn incomes that make the net
advantages of their employment roughly equal to those
of other employments which the same class of men could
undertake

Again, let us consider the profession of the pleader or
advocate This profession cannot be said to have existed
before the establishment of regular courts of law, which
was carried out gradually by the British administration ,
but the establishment of the courts was quickly followed
by a demand for advocates trained in the law, and able
to present their clients’ cases m the most favourable hght
Suoh training is not easy to organise, and m the early days
the leaders of the profession were mostly Englis hmen,
who had benefited by the system of training existing m
their own country These leaders made very large incomes,
and enjoyed many other advantages m the way of influence
and social position , the attractions of the new profession
soon became apparent, and while, on the one hand, means
of training were provided m the country, on the other
hand, large numbers of parents took advantage of these
means, and had their children educated for the profession
At the present day the supply of pleaders is at least equal
to the demand The ablest men can still earn very large

EARNINGS OR SPECIALISED OCCUPATIONS 325

incomes, but; many pleidets earn very halo , and if it
vero possible to work out the average mcomo of all the
pleaders m a city' v hero they are numerous, the average
Mould probably' be lover than Iho averago earnings of other
professions of the same rank The chfforenco is accounted
for in part bv tko of her advantages of Iho profession,
but faking alt tho advantages (including tho mcomo)
info account, if is still probablo that pleaders aro on the
averago wor-e off than men of other professions: that is
to say’, the present supply is excessive, and tho excess is
due to tho fact that for many years parents have over-
estimated the advantages of tho pleader’s position
Thcso examples Mill help students to understand that the
adjustment of Iho supply in thcso occupations and pro-
fessions ic by no means perfect : causes aro at work tend mg
to adjust the supply' m such a way that tho various occupa-
tions or professions In tho same grade offer equal net*
advantages, but these causes, from their very nature,
work very slowly, and changes in industrial organisation
(which may occur with relative rapidity) may entucly
upset tho adjustment. It follows that any particular
occupation or profession may for a considciablo period
remain over-supplied, or under-supplied, and that its
earnings may bo less or moro than tho amount that would
result if tho supply could bo adjusted more rapidly.

Another consequence of the slowness of adjustment is
tho risk of men being unable to cam a living in the occupa-
tion or profession which they havo chosen This occurs
when the demand falls off in an occupation which is already'
fully suppbed with w’orkers , the fall m demand may be
duo to changes m tho organisation of production, to new
discoveries that make tho old ways obsolete, or merely
to some change m consumption, but the effect m any case

326 AN INTRODUCTION TO ECONOMICS

is that men who are skilled in some particular occupation
are no longer able to find employment in it : they must
either learn a new occupation or work as general labourers.
A simple example may be found in the present position
of the water-carrier (bhtshh) caste in the cities of northern
India. Large numbers of these men were formerly employed
m watering the streets and gardens, and in the domestic
work of M uhamm adans and Christians, hut when a regular
water-supply was introduced, the water-earner’s occupa-
tion was much reduced, because most of the domestio
work is provided for by house-connections, and the streets
are watered from carts A large proportion of the water-
carriers was thus thrown out of work The men were
unable to make a living by the only occupation in which
they had special skill, and many of them have taken to
general labour, because it is the only means of livelihood
within their reach This condition is spoken of as un-
employment, and the risk that it may occur has to be
allowed for in every specialised occupation ; as the speciali-
sation of occupations increases, unemployment must also
bo expected to increase in importance, but m the present
industrial condition of India it is not a very widespread
ovil, and its 6tudy may for the present be deferred

CHAPTER XLIV
EARNINGS OF MANAGEMENT

We now come to the last of the claimants for a share m
the wealth that is produced , this is the Producer him-
self, the man who organises and manages production We
have already seen that, as a matter of fact, the producer
usually contributes some other factor of production m
addition to his organised work the cultivator and artisan
supply both capital and labour, while m the factoxy-stage
of production the employer usually provides a portion
at least of the capital ; and we have to be careful to dis-
tinguish the earnings of management from the share due
to these other factors

H, however, we allow for the separation of these items,
We see that the producer pays out of his produce the
shares of land, capital, and labour, which are determined
on the lines indicated in the preceding chapters of this
Book, and keeps what is left for himself His object is
two-fold , he wants to produce at the least possible expense,
and he wants to sell at the highest possible pnee if he
succeeds in these objects, he has an adequate share left for
himself after paying the expenses, while if he fails, he has
nothing left, or has even lost part of the capital employed
But no ordinary man vail undertake a productive enter
prise unless he expects to make an income from it, and all

328 AN INTRODUCTION TO ECONOMICS

ordinary men will give up such an enterprise if they find
that in fact they are not making an incomo, or aro making
a sm all er mcome than they could secure in other occupa-
tions, and wo must therefore regard organisation or
management as an occupation to be compared with other
occupations which a man can undertake If wo ask why
a man chooses to start his son in lif6 as a producer rather
than as a pleader or an enguiecr, we must answer that he
regards the net advantages of the one occupation as greater
than those of the other , ho hopes that his son will be
bettor off as a producer than as a pleader, that is to say,
that his whole position (and not merely his mcome) will
be better in the former case than in the latter Wo thus
see that the supply of producers must be determined on
the conditions which we have already seen to be applicable
in the case of other occupations requiring specialised skill
Let us look a little closer at a fow of the conditions which
affect this occupation The training required has to be
obtained in somewhat different ways from those which
will equip a man for a profession It is truo that much
that is of value can be learnt at a University or at a
Technical Institute In the latter a youth can learn the
sciences that underhe the methods of production, and their
application to those methods , if, for instance, he wants
to undertake the production of sugar, he will have to
study the chemistry and physics of the subject, and learn
how the machinery of a sugar-factory is designed to allow
the necessary chemical and physical changes to take place,
and to prevent the occurrence of undesirable changes ,
and in most branches of production he will find that he
needs some knowledge at least of mechanics, as veil as of
the chemistry of the materials used This, however, is
only one branch of his training * ho has also to learn the

EARNINGS OP MANAGEMENT

329

commercial side of his business, how to buy cheap, and
how to sell dear : and he has to acquire the very difficult
art of managing the labourers and workmen employed
so as to get the best work at the lowest cost He needs,
that is to say, not merely a knowledge of chemistry and
mechanics, but also a knowledge of human nature as it
is found among merchants, workmen and labourers ,
such knowledge can bo acquired only by experience, but
the best foundation for it is laid m the course of a good
general education, such as the schools and universities
aim at supplying. To these qualifications must be added
the practical experience of production a student of law
requires to spend a good deal of tune in the courts, seeing
how legal busmess is actually conducted, before he is m
a position to conduct such business himself a medical
student has to spend a long time m a hospital seeing cases
treated and operations performed before he is qualified to
start practice for himself , and in just the same way a
man who wishes to undertake the management of a factory
must get practical experience of how a factory is managed
The training for t his occupation is consequently lengthy ,
and it is often very difficult to arrange for the practical
experience that is required, while, in addition, the youth
may have to be provided with a considerable amount of
capital to enable him to start a factory, or (what is usually
more practicable) to buy a share in an existing concern,
and learn his work by working with partners of greater
experience. Again, the social position of a producer in
India is still inferior as compared with that of a landholder
or a professional man there are signs of a gradual c an Q e
in this respect, but even now comparatively few parents
among the educated classes think of this occupation or
their sons, and most of them confine their attention to

330 AN INTRODUCTION TO ECONOMICS

government service or to such professions as the law or
education It follows that the races inhabiting northern
India do not as yet furnish a large supply of men com-
petent to organise production on a largo scale, and most of
the producers are drawn either from tho families already
engaged in similar work, or from mon of other races, such
as Europeans or Parsis, m whose eyes tho disadvantages
which have been enumerated count for less It is obvious
then that the earnings must for the present bo high m
order to attract an adequate supply of men in tho condi-
tions which have been described
It is possible to recognise tho demand for men of this
land in a country where production on a large scale has
developed extensively, and in such cases we can see that
the general Law of Demand applies But the develop-
ment of industry in northern India has not yet reached a
stage where we can recognise tho existence of an omploy-
ment-market for such men , tho numbers demanded, and
the numbers available, in any industry are still too small
for that. Students must therefore become famihar with
the conditions that prevail m countries more advanced m
industrial development before they can realise the way in
which the earnings of management are determined when
large numbers of competent men are looking for a chance
of employment, and large numbers of men possessing
capital are looking for some one to employ it for them
We may, however, consider what conditions will have to
be fulfilled before such an employment-market can be
established in India

One comparatively simple step is the provision of facilities
for technical training We speak of this as comparatively
simple because it can be done by government or by the
work of a few enlightened individuals, and indeed con-

EARNINGS OP MANAGEMENT

331

sidorablo progress has been mado in this direction in the
last fow years Thero are of courso great difficulties in the
organisation of such institutions, but these difficulties are
small compared with the other conditions that have to be
realised One of these is a change in the attitude of the
educated classes of Indian society * they must recognise
that tho greatest ovil affecting India is the small amount
of wealth produced, compared with the number of people
"who have to bo supported , that increased production
requires organisation more than anything else , and that
the occupation of the producer is not less respectable, and
not less desirable, than the occupations which at present
command a social preference A second condition is a
change m the attitude of the people as regards the employ-
ment of wealth os capital ; the wealth that is lying idle
has to be brought into use, and savings have to be employed
os they accrue A third condition is a gradual development
in tho efficiency of labour , tho workers in all grades hove
to learn how to make the best use of the money which they
cam, and to recognise the need for increased technical skill
and for more careful training of their children Some slight
progress has already been made towards the realisation of
these changes in tho attitude of the people , and as the
changes progress, tho number of producers is likely to
increase, the capital that they require for their work will
become available, and then the factors of production
existing in the country will be more effectively used, an
the supply of wealth yielded by them will be increased

CHAPTER XLV

SUMMARY THE NATIONAL INCOME

We have now examined the way m which the remunera-
tion of the various factors of production is determined
Our examination has been by no means complete, for the
subject is very complex, and our present aim is merely to
obtam a general view of the mam lines of the theory of
Distribution, leaving many points to be elaborated further
during subsequent study. Wo have, however, arrived at
the following conclusions

In the case of interest we have seen that, so far as markets
for capital have developed, tho market rate of net interest
is determined by the conditions of demand and supply m
very much the same way as the market pnce of a commodity,
and that at any tune there is a normal rate of not interest,
corresponding to the normal pnce to which the market
price of a commodity tends to return This normal rate,
however, is not permanently fixed, but changes with the
changing conditions of the country in a manner that will
require much further study The gross interest paid by a
borrower is made up of net interest at the market rate,
together with charges for management and for insurance
against nsk , the amount of these charges vanes m indi-
vidual cases, so that the rate of net interest cann ot be
ascertained so easily as the pnce of a commodity, but its

SUMMARY. THE NATIONAL INCOME 333

importance is not diminished by the difficulty of ascertaining
it Ono of tlic greatest needs of Lidia at the present time
is the further development of the market so that pro-
ducers of all classes may bo ablo to obtain the capital they
requiro on rcasonablo terms , and as this development
proceeds, the theory of interest worked out by economists
will become moio and more closely applicable to the facts
of ordinary Indian life

In the case of rent also u o have seen that the conditions
of supply and demand determine the rate paid, but that
the rate varies with the fertility of the land In all countries
a stage must bo oxpcctcd to anivo when the demand for
fertile land exceeds the supply , and when this stage has
been reached, it becomes possible for tho landholder to
claim as rent the entiro produce of the soil after deducting
tho necessary expenses of its cultivation In conditions
such as pro vail m most of northern India, the effect of
enforcing this claim may bo to leave the cultivator without
adequate incentive to maintain the fertility of his land ,
and in these conditions tho State commonly intervenes in
the interest of the national income, and limits the amount of
tho landholder’s claim so as to ensure that the cultivator
shall have the incentive which is required

Turning next to wages and earnings, we have traced the
influence of tho demand and supply of workers in the various
grades We have seen that tho demand for labour resembles

generally the demand for commodities, but that the supp y
is affected by various considerations arising mainly from
the facts that the worker cannot be separated from his wor
and that he is a human being with tastes and preju ces o
his own The market rate of wages is consequently not
affected so easily as the market price of a commo ty y
small changes in the supply and demand , but t e visi

334 AN INTRODUCTION TO ECONOMICS

effects of larger changes show that the market rate does in
fact depend on these forces The standard of wages at any
given fam e is set by the standard of comfort of the wage-
earners, and in no case can a body of workers continue to
receive more than their work is worth. Further study of
the changes in the standard rate of wages must consequently
be directed mainly towards the causes that affect the
efficiency of labour, and to the relation that exists between
the labourer’s way of living and the quality of hiB work

Lastly we have seen that the conditions affecting the
work of the producer are similar to those affecting salaried
employments requiring particular forms of skill , but that
production m India has not yet been organised to the point
where a theory of the earnings of management can be based
on the facts of Indian life

These conclusions carry us some way in our study But
in an examination conducted in this way it is easy to over-
look the mutual influences of changes in the remuneration
of different factors , we do not realise sufficiently how
changes in the wages of some classes may affect the wages
of others, or how changes m rent or interest may affect the
whole commumty, and not merely the classes w T ho pay or
the classes who receive Before leaving the subject, there-
fore, let us try and view the problem of distribution in its
broadest possible aspect

We may regard the whole nation as a single co mmuni ty
engaged m produomg wealth , and we may regard the whole
of the wealth produced as the National Income, by the
consumption of which the nation lives All the working
members of the nation, from the labourer working in the
field to the owner of a large factory, assist in producing this
income , all of them are supported out of it, but they do
not consume it all Some of the income has to be applied

SUMMARY. THE NATIONAL INCOME 335

in replacing the capital used up in its production , whole in
all nations a portion of it is employed in the support of
tho unproductive classes of the population The first and
obvious interest of tho nation as a whole is that the National
Incomo should be as largo as possible To secure this object,
each of tho factors of production must be used in tho most
effective manner possible tho land must be so cultivated
as to yield the largest produce consistent with the mainten-
ance of its fertility , the men who work, whether with then
hands or with their brams, must bo efficient m the widest
sense of the word; and the accumulated wealth must be
so used as to give the greatest possible assistance to the
workers The nation as a whole is interested m seeing
that these conditions are fulfilled, and it sets aside a share
of the national income in order that the government (w
represents it) may deal with those questions which require
tho common action of the people. The other qnes h ® 8 '
leaves to bo dealt with according to the judgment of m-
viduals , but as we have seen each individual .does not d
all these questions consciously for himse , u is goi
many of lam by the custom which
view of at leant a portion of the nation
the individual may bo detamned m one of Seaways , by
law, by custom, or by to own Judgment
instance, the govamment is charged with seeing
m dividual enjoys Ins own property, and
secure tins by puiushmg thieves and cheats, and by com

•This shore may be provided ■? flvTp 1 "’ “*
instance, when tho government v be provided by

of every rupee that a man re °“? . production to be managed

sotting osido some porticular fa government manages very

by tho government thus, “? ; ! fch ’ W atof-suppIy furnished by the
largo areas of forests, and also the waiw w ^

larger nvers

336 AN INTRODUCTION TO ECONOMICS

polling them to restore to its owner any property which
they have wrongfully taken , the manner in which the
individual enjoys his property is on the other hand
determined very largely by custom , while he uses his
own judgment in acquiring property, or m parting with it
We have assumed throughout our study that a govern-
ment exists which secures to each individual his freedom to
use Ins own judgment, and the enjoyment of his share of the
national wealth On this assumption, we find that the
extent of the National Income depends in the long run
mainly on the character of the individuals who make up the
nation for this charactei determines not only the nature
of their decisions, in cases where they use their judgment,
but also the nature of the customs to which they conform
If a nation is to enjoy a large and increasing National Income,
the individuals who compose it must be hard-working,
intelligent and thrifty Hard work (whether the work is
done by the hand or by the bram) is as we have seen the
first condition of efficiency in production Intelligence
is necessary to secure the proper organisation of production,
and its adaptation to changing circumstances Thrift
implies a clear realisation of the needs of the future and a
steady effort to provide for them , the w ord thus covers the
proper regulation of consumption so as to secure efficiency,
the avoidance of w aste, the accumulation of a store of wealth
to be employed as capital, and the training of each new
generation to be more efficient than its parents
The Distribution of this National Income may be earned
out in more ways than one We have examined it on
the assumption of Industrial Freedom (Chapter IV ) and
we have found reason to conclude (though we have not
examined all the reasons) that where Industrial Freedom
prevails the share of each individual and of each class tends

SUMMARY. THE NATIONAL INCOME 337

to vary with efficiency, tho most efficient men and the most
efficient class getting the largest, shnro But the individual
and the class are dependent on the rest of the nation, because
the amount of their ^lmrc depends on the amount of the
National Imomo; and tho inefficient a ho dimmish this,
diminish not only their own share but the shares of all other
classes. When labour is inefficient there is less income to
divide, and it is not onlv the mcfncicnt labourers a ho suffer
but aho the efficient men whoso work and a hose capital
Mould yield them a larger share if labour played its part
In the same \\n} tho inefficient organisation of production
mean? not onh a smaller income for the inefficient pioducers
but also a reduced National Income, and consequently a
reduction m the shares of capital and labour
Tho mam economic n<l\ antago of the system of Industrial
Freedom i- then that it offers a reward for efficiency m the
shape of a larger slmio of tho National Income, and thus
provides an incentive to individuals to increase their effici-
ency. If tins incentive w ere felt by all tho individuals with
sufficient intensity, then every individual m tho nation
would work his hardest to attain tho greatest possible
efficiency, and tho National Income would be raised to the
highest possible amount Wo know by experience that the
incentive is sufficient in the case of a largo number of
individuals, and w e know that with a largo number it fails,
because wo can see every day some individuals working
with entiro efficiency, and others working very inefficiently
or not working at all. The success of Industrial Freedom
depends, therefore, on tho extent to which the reward of
efficiency is an adequate incentive
Tho mam economic drawbaok of the system is that the
inefficiency of some classes of the people will reduce the
National Income as a whole, and that thus the efficient

Y

338 AN INTRODUCTION TO ECONOMICS

suffer because others are inefficient The extent of this evil
is also a question of degree if the great majority of the
nation is efficient, the loss caused by the inefficient minority
will not be of great importance, "while the efforts of an
efficient minority may be very inadequately rewarded if
the bulk of the nation is inefficient
The system of Industrial Freedom docs not, therefore,
offer anything approaclnng to a certainty either that the
National Income will be maintained at the highest possible
level, or that the reward offered to efficiency' will be an
adequate incentive And people w ho feel these drawbacks
strongly frequently urge that the system should be changed
and that the nation as a whole, acting through its govern-
ment, should so regulate the production, or the consumption,
or the distribution of wealth, or all of these, as to secure
these objects more effectively Proposals of these lands
may be described m general terms as Communism or
Socialism, and students will have to study them at a later
stage They are supported by various arguments that he
outside the scope of our science, but in examining them from
the economic standpoint the main questions to be borne in
mind are Will they lead to an mcrease in the National
Income ? and, Will they furnish a greater incentive to
efficiency *

We have seen that m India the system of Industrial
Freedom has in one most important respect been departed
from in the interests of the nation as a whole, namely, in the
laws that restrict the rate of rent, and we have seen that the
economic reason justifying this restriction is the need for
an incentive to secure the efficiency of the cultivator In
smaller matters, too, the Indian government has already
interfered with the system, as in the legislation which in
some cases restricts the hours of labour in factories or

SUMMARY THE RATIONAL INCOME 339

-rr ”

put forward b.V statesmen an P measures will be

forenee villi Itulustnal brocc om their econo-

supported ^

mic effect Will nlunj*' 5 1 . , 0 f Economics is

one of 11.0 chief advantage, ’,t ceonomL aspect of all
to ensure n .luc appreciation of the busmK3

proposals which would affect the aatioa m

of its dtnlv life

INDEX

Artisans

Economic position, 103
Rato of interest paid by, 106,
266

Assumptions made in study of
Economics, 23

Banks

Functions of, 119, 246
Limitations of, 120

Buying and Hiring, distinction
between, 242

Calcutta, history of, 42

Capital

Accumulation of wealth, 92,
93

Definition of, 88
Fixed Capital, increase m use
of, 129

Interest (see that title)
Market for, procedure, etc ,
246

Necessity of, 90
Organisation of, 117
Savings (see that title)
Specialisation of, 128
Supply of, m India, 333
Caste System, influence of
Business, 25
Intellectual work, 81
Mobility and efficiency of
labour, 63, 68, 73
Specialised occupations, 131,
320,

Cawnporo, history of, 41
Comfort, standard of, 308, 310,
334

Commodity, definition of, m
. relation to Economics, 169
Companies

“Joint Stock” and “Limited,”
121

Share transactions, 123
Consumption
Definition of, 17
Expenditure of income, 169,
165

Law of Demand, 171
Wants (see that title)’
Co-operative Credit System, 263.

Delhi, history of, 39
Demand, Law of, 171
Demand Schedule for the indi-
vidual and the community,
163, 166, 169
Demand and Supply
Definition of, 179
Equilibrium of, 179
Conclusions arrived at, 227
(See also “ Market,” “ La-
bour," “ Land," etc )
Depreciation, allowance for,
237

Distribution

Claims for a share of produce,
236

Nature and theory of, 232,
235

IISDEX

341

Division of Labour, 111

Drugs, effect of use of, on labour,
311

Economics
Assumptions, 23
Definitions, 27
Meaning of, 3, 22

Equilibrium

Demand and Supply, appli-
cation to, 179

Market and normal equili-
brium, 1S5-207

Factory System, probability of
, general establishment of,
m India, 110, 132.

Fixity of Tenure, 283

Income

Change m, effect on expendi-
ture, 165

Demand schedule, 163, 166
Expenditure by the individual
159, 165

Sources of, 239 «

Industrial Freedom

Alternative systems, 33S
Character and efficiency, effect
of, 336

Economic advantages and dis-
advantages of system, 337
Nature of, restrictions, etc.,
24, 33S

Intellectual Work

Adoption of, in preference to
manual labour, some reasons
for, 85

Caste system, effect of, SI
Efficiencv, causes affecting,
81

Mobility, conditions os to, SO

Interest

Artisans and agriculturists,
rate paid by, 106, £60, £65
Gross and net interest, 252

Interest — (con t )

Normal ram, chances in,
causes nffectmc etc , £5$,
333

Ongm of sj«tcm, 02 £42
Seasonal \anations m rate,
257

Kalpi, history of, 4 1
Kananj, historj of, 40

Labour

Caste Svstcm, influence nf,
63, CS' 73
Definition of, 52
Demand and Supplj , 55, 2 ° 0 ,
292, 300, 315

Division of Lnboir, pnnciple
of, results, etc . Ill
Drugs, effect of use, 311
Education in new method*
necessity of, 7 3
Efficiencv, causes nffrctinc,
etc, 70 215 , 304, 311,731
Market Orgnn-sntton, 2*1, £05
Mobility of. conditio’ «• effect-
ing, etc . 01, 305
Standard of Conifer*. ulO,

334

Strike Si stem, 303
Unemployment m India, 3-t.
Women, influence of, 317
(See also “ Speciah'-nl Ocr-
pations ” ai'd H ccv }

and „ ,

Demand and S,*ppl>,
Fertility of tl «• se 1, 4i ,
jfixitv o f ‘enure. £S »

Item* mc’udxl m U“—
Landholder*, ‘ *'

fvs**in n Irdift* ’

Law of D *nin*n Ee‘*i*r *

47, 4i, 271
Locat on a a o'*. -

Mnrgmof cul , -'"i* o",
Kent (f«e that titl")

113 ,

342

INDEX

Land — ( cont )

Specialisation of, 125
Standard of work, 47
Tenure system in India, 267
Law, \ nnous definitions of, 4, 49
Localisation of Industries, 127

Machinery, use of, 113
Management, oarnmgs of, posi
tion of producer, status,
training of, etc , 327, 334
Market

Definition of, 182
Equilibrium, 185-208
Holding up stock, 196
Organisation and working of,
183

Relation of producers and con-
sumers to, 201

(Seo also names of Special
Subjects as “ Land,” “ La-
bour,” “ Capital, ’ otc )
Monej , purchasing power of, 26,
231

Money-lendors, 216, 260
Mursludabad, history of, 41

National Income, factors pro-
ducing, distribution of, otc ,
334

Pleader or Ad\ocato profession,
status and earnings of, 324
Population

Causes influencing, 65
Molthus' Law, 52, 314
Surplus, provision of subsist-
ence for, 68
Producor

Income, sources deriv od from,
239

Position of, 239, 327, 334
Production
Artisan since, 103
Definition of, 17

Production — ( coni )

Expenses of, changes m, 214,
217, 218, 307

Faotors, and specialisation of,
31, 126

Factory stage, 110, 132
Organisation, self-supporting
stago, 95

Profits, nature of, 239 (note 2)
Purchasing power of money, 26,
231

Rent

Agricultural land, method of
determining, 267, 269, 285
Classical theory of, 277
Economic rent, 277
Fair rent, definition of, 284
Limitation of, by legislation,
281, 333, 338
Normal level, 271
Relation to prices, 280

Savings

Investment of, amongst poorer
dosses, 123

Process of accumulating, 91,92
Scienco, definition of, 8
Self-supporting systom, 96
Specialised Occupations
Caste system, effect of, 320
Demand and Supply, causes
affecting, otc ,318
Earnings of, 318
Mobility, 319
Special training for, 320.
Spcciabsation of Labour, 127,
131

Stock, holding up, 106
Stnke systom, 303

Taxation, Allowance for, 238,

Utilities

Production and consumption
of, 20

INDEX

343

Utility , .

Definition of, in relation to

Economics, 160
Value, definition of, 15

Wages '

Agricultural Labourers, in-
crease in rate, 222

Customarj rural rates,
203,310

Efficiency of Labour, effect on
rate, 298

Prevailing and normal rate,
292, 310

Real and Money wages, dis-
tinction between, 294

Rise m, in India, 222, 223, 311

Specialised labour, earnings

Variations in rate, 298, 301,
333

Wants .

Exceptions as to mcrease of,

Increase m number and
variety, 141

Nature of, etc , 139
Necessaries and Luxuries, 161
Relation between demand and
wants, 163

Satisfaction of, 141, *40
Wealth

Definition of, a .

Estimate of, difficulty of mak-

H oar ding of, reason for habit,

Small 1 amount produced m
India, compared with popu

lation, 331 lahour

Women, influence of, m la
mg class, 317

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